Improved business lending rates, the suggestion that consumer borrowing is not as high as many fear and a better-than-expected savings rate are three of the reasons why Neil Woodford remains confident on the UK economy. 
FE Alpha Manager Woodford (pictured), who runs the £9bn CF Woodford Equity Income and £729.8m CF Woodford Income Focus funds as well as the £789m Woodford Patient Capital Trust, has argued for some time that many investors are too negative in their domestic outlook.
The UK’s vote to depart the EU in the next two years prompted a wave of bearish sentiment on the economy, as many argue that the severing of relations with the country’s largest trading partner and the uncertainty this creates will have a disastrous effect.
Speaking ahead of CF Woodford Income Focus’ launch earlier this year, the manager said: “I wrote in the lead-up and aftermath of the Brexit vote that my view was that if Britain decided to leave the EU, that wouldn’t be an existential threat to the economy. I think broadly the economy has surprised. I think increasingly the red faces amongst the official forecasters are getting even redder.”
UK loan growth (split by segment percentage)
Source: Redburn, Woodford Investment Management
Woodford Investment Management’s Mitchell Fraser-Jones highlighted the above chart as being one reason for optimism in the UK economy.
Much attention has been given recently to the growing consumer debt burden in the UK and how this could pose a severe risk to the long-term health of the economy. However, Fraser-Jones suggested this this risk may have been over-egged and noted that it is lending to businesses that has been the main driver of loan growth.
“We believe consumer debt levels are manageable in the context of household incomes,” he said. “Furthermore, as the chart illustrates, it is evident that the growth in debt that we have been seeing over the last 18 months hasn’t really been the result of a pick-up in consumer borrowing – it is corporate borrowers that have been taking advantage of the renewed appetite for lending in the UK banking sector.”
This isn’t the only chart to have come across the desks at Woodford Investment Management that have supported the firm’s bullishness.
As noted, concerns over UK consumer debt have jumped in recent months. Andrew Bailey, chief executive of the Financial Conduct Authority, told the Guardian that government action was needed to curb the explosion in consumer credit, especially when it comes to more vulnerable borrowers.
But Fraser-Jones pointed out that consumer debt growth has not been at the breakneck pace that headlines might suggest.
Contribution to UK loan growth (split by segment percentage)
Source: Redburn, Woodford Investment Management
“In the context of recent history, although the rate of debt growth has increased as the banking sector has rehabilitated itself, it remains modest compared to the rates of growth seen in the early years of the new millennium. Further evidence, as far as we’re concerned, to suggest that worries about consumer debt are overdone,” he said.
The below chart shows the final of the three that Woodford Investment Management highlighted as supporting its confidence in the UK economy: the UK’s household savings ratio and how it is better than previously estimated.
UK household savings ratio (%)
Source: Office for National Statistics, Bloomberg, Woodford
The way the Office for National Statistics calculates the UK’s household savings ratio has recently been revised and now offers much rosier view – which should help to diminish the concerns over the scale of consumer debt, according to the asset management house.
Official figures now put the household savings ratio at between 8 and 10 per cent, compared with estimates last year that had it below the 5 per cent mark.
“Admittedly, the UK savings ratio has still been on a downward trend, as one might expect in a period when the value of other parts of the balance sheet, such as equities and most households’ primary asset, the house itself, has been rising,” Fraser-Jones said.
“The pace of the decline in savings, however, has been much less sharp than previously estimated.”
Overall, the UK’s economic data has been “resilient” in 2017 despite the frequent warnings that the Brexit result would lead to the economy falling off a cliff, he pointed out.
“That never seemed likely to us and the data, thus far, is supportive of our view,” Fraser-Jones concluded.
“We remain positive on the outlook for the UK economy – much more positive than the gloomy prognosis implied by market valuations – and that is reflected in our long-term investment strategy. The evidence that the UK economy is in better shape than many have expected continues to mount.”