The returning UK star, who is launching his own fund – Woodford Equity Income – after exiting Invesco Perpetual earlier this year, said he was avoiding BP and Royal Dutch Shell, among others, as their dividends remain at risk.

Woodford’s view comes after both companies having raised payouts in recent weeks following better-than-expected Q1 results.

“We will see dividend cuts, as there are a lot of headwinds,” he said.

“The macro backdrop is challenging and many businesses have grown dividends without earnings growing, like BP and Shell. Their dividend payments are paid from disposable proceeds, and these two dividends are under threat.”

The recent dividend increases have led BP and Shell to find favour with many following several years of relative underperformance.

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But both companies still face issues, with BP’s ability to materially grow production further hampered by its asset disposals since the Macondo oil spill, also referred to as Deepwater Horizon.

Shell, meanwhile, has been particularly affected by lower oil and gas prices as well as a challenging European refinery market.

Woodford added both stocks face a huge challenge over how to cut capital expenditure without cutting production growth.

“They are two very stressed organisations and I do not find them terribly appealing,” he said,

“I will not own them until they are much better value than they are now.”

Concerns over other UK stocks

In a wide-ranging discussion, Woodford – speaking at Chelsea Financial Services’ annual investment dinner – also said that the stocks of medium-sized companies looked to be the most overvalued area of the UK market, following strong outperformance in 2012 and 2013.

The manager said a similar trend was playing out in US technology and bio-tech stocks, two other sectors he views as having raced ahead of fundamentals. He expects all three parts of the market to continue to underperform in the near future.

“You are starting to see quite a significant correction, and it is the case, if you believe what you hear on the economy, that the gap between fundamentals and the economy is starting to close.”

He added some of the “insanity” that was seen leading up to the market crash of 2008 was being repeated now.

“[Online clothing retailer] ASOS has almost halved, for example, and if that can happen in two months it gives you an idea of what universe we are in.”

“So markets are more vulnerable than they have been for a long time.”