Comments - Anthony Bolton, Neil Woodford & Hamish McRae

Some comments from some of the few people that are worth listening to,
even though 2 of them are plugging their funds. Pharma, media,
tobacco, utilities, oil, telecoms, govt suppliers. Basically as
pessimistic as equity fund managers can get as they can always find
some excuse why people should invest/remain invested irrespective of
the risk vs. reward offered.
Anthony Bolton, Managing Director and Senior Portfolio Manager at
Fidelity International
Anthony Bolton
Mr Bolton expects stock market conditions to worsen before new
opportunities for investment emerge in 2008, perhaps as early as the
first half of the year.
Financial outlook 2008
Having cut his teeth as an investment manager in the 1970s, Mr
Bolton's current views on markets have been informed by his experience
of the secondary banking crisis during that decade. "I remember that
the effects can take some time to work their way through, but when
they do, they act like a cancer - starting in one area and then slowly
spreading to others. I would expect the contagion to seep into most
stock markets."
In Mr Bolton's mind, the most important question is whether the "real
world" will be affected by the turmoil in financial markets. He fears
that the combination of tightening credit, increasing pressure on
consumer expenditure and falling property prices will have an impact
on the economy.
"While the first phase of the crisis for banks such as Northern Rock
is about funding, the second could be about arrears."
A tough year but opportunities will arise
Banks will remain a difficult call for investors next year. Mr Bolton
expects that some banks could be forced to raise more equity or cut
their dividends. Interest rate cuts alone may not be enough, at least
in the short term, to change this picture. However, out of this
environment opportunities will arise.
"I expect to become more positive about markets next year as the
consensus becomes more bearish. In the meantime investors should have
a bias to larger well-financed, non-cyclical companies. Two sectors
that I prefer are pharmaceuticals and media: they have been out of
favour with the majority of investors and look cheap versus history."
Mr Bolton expressed his concern about the level of equity markets in
the early summer, observing that the bull run was already more than
four years old and that investors were failing to differentiate
between high and low risk opportunities.
"I went on record earlier this year in saying that when banks were
willing to lend money with no or very relaxed covenants, one needed to
be wary. I didn't know at the time that would stop the bull market,
but I believed that the risk/reward pay-off in the market was not
favourable enough. We now know that the turning point was the banking
crisis that started in sub-prime lending," he says.
In January 2008 Mr Bolton will step down from day-to-day fund
management to take on a new full-time role at Fidelity International,
mentoring the younger portfolio managers and investment analysts,
supervising the investment process and looking at the application of
company research techniques to the charitable sector. Management of
both funds will pass to Sanjeev Shah."
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Neil Woodford, Invesco Perpetual
Prior to the credit-market disruption, I was quite sanguine about the
outlook for the UK economy (and indeed, the global economy) reflecting
my more cautious perspective with respect to the consumption-led
growth that was driving the US and UK economies.
Financial outlook 2008
Woodfood favours tobacco stocks for 2008
My view was that higher interest rates would, with a lag, restrain the
willingness of consumers to continue to borrow to fund current
Furthermore, I was concerned that asset prices, especially house
prices, had reached a level where there was the potential for a
reasonably significant correction.
My feeling was that this would happen, in the normal course of events,
by the latter half of 2007 and that 2008 would be a year of
considerably slower economic growth in both the US and UK.
But then along came the credit issues associated with subprime-
mortgage lending in the US. The consequent crisis in the financial
system hit the UK in a very major way, best exemplified by the run on
Northern Rock bank.
'Chance of a recession'
My current view on the UK economy going into 2008, in light of the
credit-market crisis, is that the risks associated with the economic
correction that I was already expecting have increased.
Put more tellingly, I believe that the chances that the UK and US
economies will go into recession in the months ahead have risen.
My belief is that the US economy could contract in the fourth quarter
of 2007 and that the UK economy could experience something resembling
a recession at some stage in 2008.
The principal foundation of my belief in a possible recession is based
on the fact that the borrowing costs of indebted consumers and
businesses have risen as a result of higher market interest rates,
which is a function of the liquidity constraints that are currently
hitting the banking system.
'Reasons to be cautious'
Despite my cautious outlook for the UK economy in 2008, I do not wish
to portray too gloomy a picture about the outlook for the UK equity
asset class.
I am cognisant of the fact that there will be problems ahead for some
companies in various sectors, particularly those that are
operationally and financially geared, and are reliant on the consumer
economy and indeed the UK housing market (which I believe is going to
experience a long-overdue correction).
However, in my view, some of these problems have already started to be
priced in to several stocks in these vulnerable sectors. That said, I
believe it is too soon to clearly judge the extent of the correction
and what impact it will have on the profitability of those companies
that are facing difficulties.
'My strategy'
My funds are defensively positioned and I have sought to increase
exposure to companies and sectors where I believe defensive
characteristics are undervalued.
Therefore, I expect that even in a more difficult economic
environment, there will be an opportunity to make positive, absolute
and very good relative returns in 2008, although it is not going to be
easy. In fact, a high single-digit return in 2008 will be a very good
outcome, in my view.
I am confident that we will, over a three- to five-year period,
achieve decent positive returns from this level, albeit that the
environment is a lot more uncertain than it has been for some time.
'Opportunities still persist'
Away from the UK consumer, there are plenty of companies and sectors
in the UK equity market that do not have a direct connection with the
consumer and the economic correction that I am expecting to see in
2008. In fact, there are several companies displaying characteristics
that would thrive in this environment, characteristics such as stable
business models that are not cyclical, and predictability of
cashflows, profits and dividends going forward.
Since we have not had a recession (particularly a consumer-led
recession) in the UK since the early 1990s, many of these defensive
characteristics have been progressively devalued over a prolonged
period of time.
I believe that we are now in an environment where some of these
characteristics may well be re-valued, albeit that the outlook is
clearly more difficult given the prevailing uncertainties surrounding
the liquidity squeeze and credit crisis (and how that will be
resolved), the consumer economy and the housing market.
However, despite this, there are companies and sector groups in the UK
equity market which I believe have the potential for good absolute and
relative performance in 2008.
'Favourite stocks'
By my estimates, pharmaceuticals stocks AstraZeneca and
GlaxoSmithKline look attractive, as do utility stocks in general,
where the fund retains significant exposure in a number of areas,
including gas, water and electricity through holdings in British
Energy, Drax, International Power, Scottish & Southern Energy and
National Grid.
Elsewhere, tobacco features prominently in the funds. The funds
exposure to this sector has been reduced in the last 12 months as a
result of a number of takeovers and some investment activity, but
broadly the funds retain a good exposure to the sector through BAT,
Imperial Tobacco and Reynolds American.
I also see opportunities in telecoms, where I believe the sector has
stocks with many defensive characteristics and good business models.
The funds have large holdings in BT and Vodafone. Vodafone has
performed very well in the last 12 months, while BT has not performed
particularly well.
In my view, both companies look very cheap and attractive at this
level. Meanwhile, there are plenty of other stock-specific defensive
plays in my funds, such as Capita, and stocks in the oil sector with
defensive traits, such as Royal Dutch Shell and BP."
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"Hamish McRae: The real problem isn't the banking crisis
Published: 19 December 2007
It is time to stand back. There is too much churning around on the
economic front at the moment, too much noise and not enough thought.
The plight of Northern Rock is being bundled up with the problems of
the global money markets; the threat of a UK housing crash with the
dangers of a US recession; the performance of the UK economy with what
is happening to the Government's own finances. The fact that the
Government is on the ropes adds to the confusion, for it is being
attacked on issues where opponents can score cheap points rather than
for its longer-term errors of judgement....."
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