Invesco Perpetual’s star manager Neil Woodford does not believe the US economy will emerge from the bank crisis resolution period this year, contrary to the views of bullish investors who think the country is entering a new era.
The manager of the £11 billion Invesco Perpetual High Income fund, speaking at a conference last week, said the run of better economic news from the US is an encouraging development, although he said one of the key questions is whether this presages a new phase for the US economy.
He said: ‘I do not wish to dampen the bulls chips but the answer to the question in my view is no. The US banking system appears to be a lot further through its crisis resolution than any other developed economy but I do not believe that its economy is about to normalise and neither does its Central Bank.’
The Citywire Selection manager said excessive debt in the consumer and government sectors will continue to constrain growth, while credit creation is barely positive and fiscal consolidation awaits the US economy at some stage this year, although this will be even more serious in 2013 after the presidential election.
He said: ‘Most importantly though, in a fractional banking system, three criteria have to prevail before a crisis resolution period can be viewed as complete.’
The criteria include the need for no wholesale funding gap, which can be closed through deleveraging; that all hidden losses be realised; and ultimately, for an adequately capitalised banking system.
‘These three conditions are still some way from being met.’ said Woodford. ‘Consequently, although I expect the US economy to continue to outperform other developed economies over the medium term, growth will continue to disappoint and, in the short term, growth will slow in 2012.’
Woodford said while global equity and other financial markets are currently experiencing a renewed bout of optimism in the view the recovery is upon us, he remains sceptical.
‘We maintain our view that since the banking crisis of 2008 the developed world has been facing a prolonged period of low economic growth, and believe that current optimism will, as a result, soon be checked.
‘This does not mean that equities will necessarily fall significantly and neither does it alter the confidence that I have about the scope for an appropriately positioned portfolio to make money.’
As a result, Woodford said his strategy remains unchanged and he continues to focus his portfolio on fundamentally ‘cheap’ companies, where valuations continue to underestimate their ability to grow through a prolonged period of economic stagnation.
Over three years, the Invesco Perpetual High Income fund has underperformed, returning 53.8% compared to the benchmark’s 77.8% as he was reluctant to increase cyclicality in the fund as appetite for risk assets increased in the improving economic climate.