Neil Woodford said he expects the stock market bubble that has hampered the performance of his flagship £8.2bn Woodford Equity Income fund will burst this year.
2017 was a torrid year for the fund, which returned 0.53 per cent in the 2017 calendar year, compared with over 11 per cent for the average fund in the IA UK Equity Income sector in the same time period.
Mr Woodford attributes the poor performance to his being heavily invested in sectors such as banks and housebuilders, while the market has focused on areas such as mining and on big international earning businesses.
Mr Woodford's view that this year the stock market bubble will burst would mean the market is too optimistic about the outlook for the Chinese economy, and the global economy, while being too pessimistic about the prospects for the UK economy.
He said the performance of the Chinese economy is driven by unsustainable credit growth, and the global economy by low US interest rates.
Mr Woodford said he thinks those trends will diminish, and his fund will perform better.
The fund manager said: "This is a consistent feature of bubbles – there is always a subset of the market which falls out of favour as investors increasingly pursue the excitement that exists elsewhere.
"In the dotcom bubble of the late 1990s it was the 'old economy' stocks, like utilities, food producers and tobacco companies that fell hugely out of favour, as the market became obsessed with internet stocks that offered exposure to the 'new paradigm'.
"Today, in the UK stock market, it is domestically-focused stocks which have become profoundly unloved and undervalued."
He said: "Predicting the timing of such an outcome is of course fraught with difficulty. Already, however, there are certain events starting to happen which we believe will threaten the cosy consensus view of the global economy that has crept steadily into markets over the last two years.
"Whether it is higher US interest rates coupled with the gradual withdrawal of quantitative easing in the US, signs of changing priorities from Chinese policymakers, or indeed the UK economy’s continued defiance of expectations of a slowdown, there is already ample evidence to suggest a much more favourable market and economic backdrop for the fund's performance in 2018 and in the years beyond it."
Mr Woodford said he has been "steadily increasing" his exposure to shares exposed to the UK domestic economy, such as house builders and banks, as he feels those parts of the UK market represent a "compelling investment opportunity."
He said those are sectors of the market from which he has largely been absent for 15 years, as for much of that time he had been wary of the outlook for the UK economy.
Mr Woodford is not of the view that UK economic growth will be markedly better than it has been in recent years, just that it will be better than the consensus view.