Everyone is talking about Britain’s vote to leave the European Union, but Neil Woodford, acclaimed fund manager and founder of Woodford Investment Management, thinks “there are many more important influences on the long-term outlook for the UK economy”. Problems in the eurozone, “liquidity problems in emerging markets, a dangerous credit bubble in China and the continued threat of a prolonged period of deflation” mean that “investors have a lot to worry about”.
One particular worry is the US. The US central bank, the Federal Reserve, clearly saw its interest-rate hike in December 2015 as “a valedictory move to declare victory over the stagnation that had afflicted its economy ever since the financial crisis”. And given its “relatively robust domestic growth and a job market deemed to be approaching full employment”, perhaps America does need tighter monetary policy. But “it certainly was not what the rest of the world needed”.
Because of the US dollar’s status as global reserve currency, “when the dollar is strong, it effectively means global liquidity conditions become tighter”. This is particularly painful for emerging markets, “which are reliant on the flow of dollars to sustain their economic growth”.
In the long run, Woodford thinks “a Bretton Woods-style accord is required to enable the global economy to move on from the current period of stagnation”. But for now, that sort of international co-operation seems a “remote” prospect. So investors should stick to firms “that are largely in control of their own destinies”, rather than those largely reliant on a healthy global economy.