US-UK sharemarkets have hit bottom, says fund chief

One of Britain's top fund managers believes stockmarkets in Britain and the US have bottomed out - but it will be at least three years before it is worth investing in UK banks again.

Neil Woodford, head of investment at Invesco Perpetual and one of the few fund managers to have avoided the sector completely in the run-up to the crisis, thinks the stockmarket has hit a nadir in Britain and in the US, but some sectors still look vulnerable - including the banks.

He predicts there will be further bad debts on their lending books and the need for more capital injections.

"I think they're really uninvestible from an equity point of view at the moment," he said.

"In time, maybe, post nationalisation, when they come back cleaned up, they'll look very attractive businesses, because banks ought to make good returns in a benign economic environment and are good places to invest."

But he would be "surprised" if that happened in the next three years.

Woodford has gained a reputation as one of Britain's most astute investors.

His equity income and high income funds have fallen 17 per cent over the year to February. But that was considerably better than the 33 per cent fall in the market, and 27 per cent drop in similar funds, over the same period.

Over five years, his funds have gained 40 per cent, despite a drop in the stockmarket over the period - almost 40 times the return of the average fund in his sector.

He warns this is "not like any sort of recession that we've seen in recent, modern economic history" and does not expect "green shoots" of recovery for some time.

"We've had over a decade and a half of very benign economic conditions; debt has built up significantly in the economy and in the banking system," he said.

"My view is that the process of rebalancing the world economy and the domestic economy will take many years. We could be in a weak economic environment really for a prolonged period of time and I'm thinking three to four years at least."

Woodford also predicts that house prices in the UK could fall a further 20 per cent before they bottom and that the crash will leave home owners with a completely different relationship to their homes.

"I think house prices will get cheap in the same way that they were over-valued earlier in the cycle [and] will then stabilise for a long period of time. [They] will probably not grow in real terms for a long period."

Woodford says he worries about the value of the pound and expects sterling to fall further.

"This is a very challenging environment, it will find out a lot of businesses and money will be lost in many investments. Recovery will come; it's some way off, but I think when it comes, the fundamentals of the UK economy will be far more robust and more sustainable than they've been in recent years."

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