Uh oh… Neil Woodford might have called a top to this market.
The country’s leading fund manager is now hinting on his blog that picking winners may no longer be so easy.
“What will happen to financial markets without the support of QE? How will markets cope without the drug to which they have become addicted?” he asks.
Just tell me what you think, Neil…
“I don’t know the answer, only time will tell, but I suspect that the gap that has opened up between valuations and fundamentals will start to close.”
Translation: Mr Woodford reckons share prices are generally too high and expects them to fall.
Indeed… he’s convinced the ‘tapering’ of central bank money-printing has already started to knock prices, “with the tide NOW turning…”
“Over the next five years”, he predicts, “I expect to see a stock-picker’s market – an environment which ought to favour a fundamental investment approach and a cautious investment strategy.”
‘A stock-picker’s market’?
I believe that’s polite City talk for goodbye bull run and hello choppy market correction…
The froth has fizzled and the shares seem like a bargain
So, with Woodie feeling pessimistic, is it a case of dumping shares, heading for the bunker and stocking up on cash, gold and baked beans…?
Not so fast, Foolish readers.
For one thing, the cautious Mr Woodford is still fully invested in shares. And for another, he’s still buying.
It’s just that what he’s actually holding and buying might be more resilient to any downturn than most.
Alongside the usual Woodie faves of tobacco and pharmaceutical stocks, he’s just bought shares in…
Yes, the postal operator has seen its shares slide from more than 600p to as low as 400p this year as last October’s flotation froth finally fizzles out…
And presumably Mr Woodford reckons Royal Mail is a bargain.
It could actually be the ideal defensive income buy, too
I must admit, I hadn’t realised Royal Mail’s shares had dropped so much since all the hullabaloo died down.
I mean, ever since I was snubbed by the government in that frenzied flotation – and watched on the sidelines as the shares raced from 330p to beyond 600p – I’d forgotten all about the shares and moved onto other bargains.
But perhaps now could be the time to get back in.
A quick check on some broker forecasts shows Royal Mail trading at about 10 times potential 2015 profits and yielding a possible 5%.
Plus, there is always that surplus property in the books – which at the time of flotation I reckoned could be worth more than £1b or 100p per share…
All told, I can’t say the shares look expensive.
What’s more, I’ll still send birthday cards in the post and order deliveries online — regardless of what happens to the economy, house prices, QE, interest rates and the situation in Ukraine.
So Royal Mail could actually be the ideal defensive income buy. I can’t blame Mr Woodford for thinking along those lines.
The uncomfortable truth for this ‘bunker’ strategy
Whether Mr Woodford’s caution will prove to be well placed remains to be seen.
You see, the hardest part of predicting a correction is getting your timing right.
A correction will come at some point. That’s a certainty. Indeed one day, they’ll also be a full-on crash.
But exactly when any setback will occur is anyone’s guess. You can’t predict them. No-one can. Not even Neil Woodford.
Just look at Personal Assets Trust, an investment trust that’s been forecasting stock-market doom and gloom of one variety or another for much of the last decade.
Right now, its portfolio is 56% in cash, government bonds and gold.
Search for the trust’s website, and you’ll find no end of monthly updates giving lengthy explanations for the caution. They all seem very sensible and plausible, too.
And yet… PAT’s ‘bunker’ strategy has meant its portfolio has lagged the index during the last 1, 3, 5 and 10 years…
The uncomfortable truth for PAT is there’s a real chance that — as and when the market does ‘correct’ — it may come far too late, and the trust will STILL be trailing the FTSE over the long run.
As I say, predicting market turns is all about getting your timing right…
Especially if you have already missed so much of the bull run beforehand.
You will NOT want to look back and wonder why you were so worried
I’m an optimist with shares. Well, you’ve got to be. Long term, the market goes UP and you are fighting hundreds of years of history if you think otherwise.
As such, I’m always looking for the silver lining. As I see things…
1) A harsh stock-market correction, when it comes, will give us all the opportunity to buy quality shares on the cheap.
2) A choppy stock-pickers’ market, when it comes, will give us all the opportunity to buy quality shares on the cheap.
3) Today’s bull market, should it continue, will still give us all the opportunity to buy quality shares on the cheap.
True, option 1) may provide more opportunities than 2), which in turn may provide more opportunities than 3). But whatever the trading conditions, there are still opportunities.
Just ask Neil Woodford, who has snapped up Royal Mail after its share-price fall…
I mean, the one thing none of us want to happen is to look back in a few years’ time and wonder why we were all so worried about a market correction…
…and completely missed the chance to enjoy substantial long-term capital gains and dividends from incredible buying opportunities.