Woodford reveals the FTSE stocks he thinks are in a bubble

Woodford reveals the FTSE stocks he thinks are in a bubble

Neil Woodford has revealed the UK large cap shares he thinks are in bubble territory and will suffer in 2018.

Mr Woodford is unsurprisingly on the look out for potential trenches to avoid, after unhappy investors shrunk his flagship Equity Income fund by more than 20 per cent in less than a year from more than £10bn in size in March 2017 to £7.9bn today (22 January).

The fund endured a tough time in performance terms in 2017, returning 0.79 per cent compared with 11.25 per cent for the average fund in the IA UK Equity Income sector in the same time period.

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The fund manager has attributed this to his aversion to a small number of stocks that he said have benefited from a sentiment - rather than fundamentals - based rally based on an improved outlook for the Chinese, and consequently, global economy.

In his latest update to investors in his fund, Mr Woodford said oil and mining stocks are among the biggest beneficiary of this rally.

The fund manager said: “The UK stock market finished the year strongly, following much the same pattern as for 2017 as a whole, with a narrow set of stocks, perceived as beneficiaries of accelerating global growth leading the index higher... oil majors Royal Dutch Shell and BP, commodity businesses Rio Tinto and Glencore, and HSBC."

What he called the "sustained momentum of these index heavyweights" has he said, "further exacerbated the gap between market valuations and the fundamentals that sit beneath them".

A surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior often end with a sharp fall in prices - which is what Mr Woodford expects from those stocks.

Looking ahead the manager said he expects global liquidity to tighten and China’s economy to slow, with both acting as a brake on economic growth and financial asset prices.

As a result, he forecasts the FTSE's hitherto big winners will see their fortunes suffer.

"I expect the UK to defy expectations of a slowdown and for the valuation stretch between the popular and unpopular stocks will begin to reverse.

"While there are risks, there are equally opportunities – that is always the case when markets get carried away.

"I believe the best opportunities lie in UK domestically-focused stocks, a healthcare sector that has endured a prolonged bear market and companies (of all sizes) that have disruptive technologies at their core.”

Mr Woodford’s thoughts were echoed by James Henderson, who manages the £958m Law Debenture investment trust, among other mandates.

Mr Henderson has been selling his shares in companies such as miners, remarking that they have, “been very successful of late, but the problem is the valuation of successful businesses has got very high”.

The fund manager has instead shifted his focus to manufacturing companies.

He said: “I have always liked manufacturers, because, well a piece of tin is a piece of tin, but the manufacturer who buys the tin can make a product that can add some value.”