Invesco Perpetual star fund manager Neil Woodford warns that UK economic growth is set to slow due to slower consumption growth and higher interest rates in 2007.
Woodford, who manages income and high-income funds, says corporate profits will be hit by persistently high inflation and over-indebted consumers.
He says the run-up to Christmas does not bode well in terms of consumer confidence and says early indications are that financially constrained consumers will slow consumption.
He says it is hard to see the UK equity making significant headway after a strong 2006.
His funds have remained largely unchanged but have featured an increased weighting in mega-cap stocks, which he says look undervalued.
Woodford says: “We believe that returns will likely come from an increasingly narrow group of stocks where valuations are very appealing, although we acknowledge there are increasing pockets of danger in the market as well.”