Neil Woodford believes UK shares offer the best opportunity he has seen in his thirty year investment career as he warned the rate of growth of the global economy will slow from here.
In his latest update to shareholders this month (April), published on Woodford Investment Management’s website, the fund manager said equity and bond markets were sending conflicting signals about the economic outlook and he believed the bond markets got it right.
Based on recent bond market behaviour there could be a recession on the horizon as similar market movements were predicted before almost all recessions in recent times.
Mr Woodford wrote: "As a result of the stock market rally so far this year, bond and equity markets are now telling us very different things about the economic outlook.
"The yield on many long-dated US Treasuries, for example, recently moved below that of shorter-dated bonds. This is known as an 'inverted yield curve', which is often seen as an early warning sign that more troubling economic conditions are on their way.
"It is hard to reconcile this price behaviour in bond markets with the more buoyant mood in equity markets. We have more sympathy with the view expressed by bond markets currently and are positioned accordingly."
History shows the yield curve has inverted nine to twelve months prior to every US recession since World War Two.
The curve inverts because investors want to own bonds with a longer date to maturity and so less exposed to the short-term economic and interest rate cycle.
The yield on the long dated bonds falls as the price rises due to people buying them. But to fund the purchase they sell the bonds with a short date to maturity, causing the price of those bonds to fall, meaning the yields rise to above those with a long date.
Mr Woodford said the fact the US Federal Reserve, that country’s central bank, reversed its previous intention to put interest rates up twice this year, and instead indicated that rates may not rise at all, showed it is acknowledging that the pace of economic growth is slowing.
But he believes the UK is an exception, despite Brexit.
He wrote: "We continue to focus the portfolios where there are more attractive economic fundamentals. The UK is one such place.
"During March, we saw better-than-expected economic data in many different parts of the UK economy, including industrial production, unemployment, wage growth and retail sales."
Mr Woodford’s flagship £4.4bn Equity Income fund is the absolute worst performer in the IA All Companies sector over the three years to April 16.
The fund lost 7 per cent, compared with a return of 28 per cent for the average fund in the IA All Companies sector in the same time period.
The fund manager acknowledged that his investment portfolio is full of "unloved" companies and that his stance has made for an "uncomfortable journey" for investors in his funds.