Stocks did extremely well last year – but Neil Woodford of Patient Capital Trust is worried the good times may not continue. “Much of what we saw in 2016 does not appear to be grounded in fundamentals”, he told Money Marketing – it was instead driven by “sentiment and momentum”. In particular, Woodford fears investors are overlooking that, in both Britain and the US, budgetary conditions are “constraining” due to “eye-watering” levels of public debt. This limits the scope cutting taxes or raising public spending, something that markets seem to be taking for granted.
Investors also need to consider what’s happening in the rest of the world. The rise of populism “could pose an existential threat to the eurozone project”. As for emerging economies, these “tend to be more trade-reliant”, and so the return of protectionism “could be another headwind for them”. A stronger dollar could also be “bad news for the developing world, which is very dependent on dollar liquidity”. Alongside “China’s deflating credit bubble and slowing economy”, these “are all risks to the global outlook that should be considered carefully”.
Of course, “it is impossible to determine whether any of these concerns will translate into major problems this year”. But Woodford is convinced that “they are too important to ignore”. Unfortunately, investors seem to be complacent – the FTSE “is not as cheap as it was a few years ago”, and so “the prospect of another year of strong market returns looks remote”. As a result, says Woodford, investors need “to be selective and on top of the fundamentals of both the global economy and underlying companies”.