The outlook for stocks is as uncertain as it has ever been. In fact, there's something of a perfect storm brewing at the present time. Multiple risks are facing share prices and that's why investing like Neil Woodford could prove to be a sound move.
For example, the UK economy could endure a marked slowdown over the coming years due to Brexit. The Bank of England has stated that it believes unemployment will rise by 0.5% and that the UK economy will grow by only a negligible amount in 2017. While many UK-listed companies are international, a slowdown could dent investor confidence towards the UK and mean that valuations come under pressure.
Furthermore, the US faces a very uncertain future and this could negatively impact on UK share prices. The Presidential election is still wide open and a new President will inevitably cause a degree of uncertainty and even fear among investors. Alongside this is the prospect of a rising US interest rate, with the Federal Reserve forecast to raise rates at least once in the next year. While such a move may not slow down the US economy, investors may become increasingly risk-off in case it strangles the US economic recovery.
Given this backdrop, an investment style similar to that of Neil Woodford seems sensible. He has focused on sectors such as tobacco and healthcare that are less positively correlated to the performance of the wider economy than is the case for most companies. As a result, they're likely to perform better from both a financial and share price perspective if the current level of uncertainty persists. They also offer lower betas, which means they're likely to be less volatile than the wider index over the medium term.
Tobacco and healthcare companies also offer high yields. It's easy to obtain a yield of over 4% in both sectors at the present time and this focus on income has been a key part of Neil Woodford's investment style. With interest rates now being just 0.25% and having the potential to move lower, a greater consideration for income could be a beneficial move for many investors. After all, the income return on cash and bonds is ultra-low, while housing affordability is now starting to bite in the post-Brexit world.
Neil Woodford also tends to hold on to stocks for a long period of time. Certainly, he makes changes to his portfolio, but he's very much a long-term investor rather than a trader. This means that during periods of uncertainty, he remains rational and doesn't panic sell his holdings. This long-term view not only helps the overall returns of a portfolio, but also allows an investor to sleep easy at night. That's because they're safe in the knowledge that share prices may fall in the short run, but in the long run there are still superb returns on offer.
Is your portfolio ready for the risks ahead?
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