Neil Woodford: Hard Brexit would ‘freak out’ the stock market

The stock market would ‘freak out’ if the UK government fails to secure a deal with the European Union during the Brexit divorce negotiations, according to fund manager Neil Woodford. 

In an exclusive interview with Money Observer, which will appear in full in the March issue, Woodford explains why UK equities are wrongly being viewed as a ‘basket case’. He also addresses performance, explaining why he believes he will ultimately be proved correct in betting on the fortunes of businesses heavily exposed to the UK domestic economy.   

Woodford also lifts the lid on his thinking on Brexit, an event which he says will not cause the UK economy to fall off a cliff.

He thinks the underlying strength of the UK economy is not getting the credit it deserves, and is convinced that at some point there will be some sort of catalyst that will change investor perceptions. 

‘Sooner or later there’s going to have to be an acknowledgement that the UK is not a basket case. All throughout the year there will be umpteen opportunities for the economy and for the companies that operate within it to prove this overwhelmingly bearish consensus wrong,’ he says.

The big elephant in the room – Brexit – has been one of the big factors behind investors deserting the UK stock market, with figures from the Investment Association (IA) showing that billions of pounds exited the IA UK All Companies and IA UK Equity Income sectors in 2017. 

But, regardless of whether it is a ‘hard’ or ‘soft’ Brexit, Woodford expects the impact on the UK economy to be negligible. The stock market, however, is a different story. He predicts that the stock market would suffer a short-term dip under a hard Brexit. 

‘The stock market would completely freak out if there was a hard Brexit and I think that would be wrong, as I don’t believe a hard Brexit is going to be anything like the economic headwind that people believe it to be,’ he says. 

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Woodford explains that there would ‘clearly be a lot of associated uncertainty with what a hard Brexit meant for the economy’, which in turn would cause jitters in the financial markets. 

He adds there is an ‘obsession’ with Brexit among the media and in political circles, and that the consensus view seems to be that it will be a disaster for the UK economy. Woodford disagrees with this prognosis and instead argues businesses don’t seem be too concerned about Brexit. 

‘The businesses that do the employing and generation of wealth in the UK appear to not be that obsessed with Brexit,’ he says. ‘If they were obsessed about Brexit then why are there a record number of people in work and a record number of job vacancies, and also why are businesses advertising to hire 800,000 people? I am not sure that businesses are actually that worried about it.’ 

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Woodford says his own preference would be for the UK to avoid a hard Brexit, and that it is in both the UK’s and Europe’s interests to shake hands on a deal that is best for business.  

He adds: ‘My central case has been all along is that there will be a negotiated deal, not least because it is not just in our interest but also in the European Union’s interest to negotiate a deal. I am sure that BMW, Mercedes, Audi, all these companies are going to be pushing their politicians very hard to make sure they have tariff-free access to the UK market – these are important businesses with a lot of political influence.’ 

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