Neil Woodford has warned investors to expect further downgrades to profits forecasts for those companies more sensitive to the economic cycle.
Woodford, manager of the Invesco Perpetual Income and High Income funds, says the impact of the ongoing crisis in Europe, a slowdown in the US and persistent reduction in borrowing across the western world continue to limit the pace of global economic growth.
However in his monthly update, the fund manager says he does believe there is a “population of stocks that can grow consistently through this difficult period”.
He says: “We believe companies that have been delivering growth since the 2008 banking crisis will be able to continue to do so, and we do not believe that they are currently valued for that ability.”
Woodford says December was a mixed month for the UK stockmarket, citing concerns earlier in the month over the US fiscal cliff, Greek debt crisis and the reduction in the eurozone growth forecast to 0.1 per cent.
He says: “Confidence was restored mid-month on the back of increased optimism about an orderly outcome to fiscal discussions in the US and as eurozone leaders and the International Monetary Fund came to an agreement over the Greek bailout.
In another warning from a high profile income manager, Bill Mott, manager of the Psigma Income fund, has warned that central bankers have raised the chances of increasing inflation by continually introducing unprecedented policies into the market.
Mott says the chances of inflation have now increased to 35 per cent and that we are now reaching an inflection point where markets be more worried about inflation.
He points to a number of policy decisions that have raised the chances of inflation. These include the unlimited use of quantitative easing and the impact on currencies; a misdirection of the ultra low interest rate policy; the Bank of England giving up on inflation targeting and the end of imported disinflation.
“To some extent, inflation is already with us. The Bank of England has exceeded the middle of its target inflation range for 38 months in a row. What is remarkable is that despite this persistent inflation, the UK gilt market is trading at such low yields. Real interest rates on bonds have been negative for some time. Are low gilt yields telling us that the bond markets are relaxed about the inflation numbers? Or is it rather that the same target-busting Bank of England has been the most enormous buyer of gilts and has successfully subverted all price signals?”