Investors piling cash into certain global stocks has created a bubble the likes of which has been seen only twice in the past thirty years, according to fund manager Neil Woodford.
Mr Woodford said the in the US investors have heavily backed stocks displaying growth characteristics, instead of value.
In the UK domestically focused stocks have been shunned in favour of large companies with international earnings but low growth characteristics.
He compared those discrepancies to the extreme valuations at which the technology stocks traded at the turn of the century, and banks and real estate shares traded at before the global financial crisis in 2008.
"There are so many lights flashing red that I am losing count," he said.
Much of the esteem in which Mr Woodford is held by market participants is the result of his having ignored those bubbles in the past, instead delivering strong returns.
He said the shunning of the UK domestic shares is an opportunity for profit on the same scale as he achieved when those earlier bubbles burst.
Mr Woodford has long been hostile to the effects that central bank policies of record low interest rates and quantitative easing on the valuation of risk assets.
The fund manager warned that bitcoin, the valuations of some high yield bonds, and the popularity of exchange traded funds (ETFs) that are triple leveraged - that is borrowing three times their value to invest in the market - are all warning signs for the global market.
The low yields that are the result of quantitative easing have pushed investors into riskier assets in a search for yield, while cheap credit has encouraged borrowing to buy those assets, creating a bubble, in his view.
"Ten years on from the global financial crisis, we are witnessing the product of the biggest monetary policy experiment in history," he said.
"Investors have forgotten about risk and this is playing out in inflated asset prices and inflated valuations."
Mr Woodford, who runs the flagship UK Equity Income fund, has a positive view on the UK economy, and has seen the returns for his investors suffer as a result.
The Woodford Equity Income fund has shrunk from £10.1bn to £8.2bn in over recent months, with large institutional investors such as Jupiter and Architas losing faith in the manager.
The fund has returned 1.2 per cent over the past year to 1 December, compared with an average return of 12 per cent for the average fund in the IA UK Equity Income sector in the same time period.
The performance of his funds also suffered during those previous bubbles, and he was very close to losing his job at Invesco Perpetual when his fund ignored the dot com shares at the start of the century, before he was proved to be correct.
Mr Woodford’s view is that investors are being too negative on the outlook for the UK economy, and too positive on the prospects for the rest of world, particularly those markets most reliant on Chinese consumption.
He believes the UK economy will start to perform better because the banking system has been repaired, so lending will increase.
In contrast, he believes the Chinese government have allowed a debt bubble to be created, which will burst, and that will harm the returns of the mining stocks and other businesses currently performing well on the FTSE 100, that the Woodford funds do not own.
Simon Ward, an economist at Henderson Global Investors, noted recently that money supply growth in China has begun to slow, this is slowing, which indicates that banks are lending less, is often viewed as a sign that a recession is two or so years away.
Mr Woodford, comparing his ability to ride previous bubbles with now, said: “Obviously, the late nineties dotcom bubble was a painful period of performance for me. By focusing resolutely on fundamentals, my funds enjoyed a meaningful period of positive performance when the bubble burst, continuing to rise in value as the market plummeted in 2000 and 2001.
"In the dotcom bubble it was the old economy stocks – today, in the UK stock market, it is domestically-focused stocks which have become profoundly unloved and undervalued. The funds I manage are positioned to exploit this opportunity and I am utterly convinced it will pay-off when the bubble bursts, which I believe it inevitably will."
David.Thorpe@ft.com
