Woodford targets defensives over cyclicals

Invesco Perpetual's head of investment Neil Woodford says defensive areas of the market remain undervalued and offer opportunities to deliver strong dividends and cash flow.

He pinpoints pharmaceuticals, tobacco and utilities as sectors where investors can make money despite the recession.

Woodford says: "I am erring on the side of defensives and I have been focusing on the resilience of business models. It is far too early to go fishing in deep cyclical areas of the market despite the tough economic environment."

In a bearish prognosis of the UK economy, Woodford sees no 'green shoots' and says the crisis will "encompass a prolonged adjustment", with at least three to four years before a recovery begins. He also expects sterling to weaken and fall further.

Despite his pessimism, Woodford believes the UK and US markets have bottomed, but says investors have to be careful about specifics.

Woodford is broadly supportive of policymakers' measures, such as interest rate cuts and quantitative easing, and says they may prevent the economy from falling into a deep recession.

In terms of the banking crisis, he says with the launch of the asset protection scheme to recapitalise UK banks, most of the ammunition has already been used.

He says: "If banks require more capital injections then we will see explicit nationalisation. We are still unearthing the extent of their bad assets. I would be surprised if banks would be investable over the next three years."

Dividend sustainability growth will also become a rare commodity in the UK, according to Woodford.

Following the IMA's decision to shift 17 funds including his Income and High Income portfolios into the new Equity Income and Growth sector, Woodford says the development will not alter his management style.

He says: "I would imagine the fund would be in a position where it can go back into the income sector in a year's time."

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