Fidelity’s head of asset allocation Trevor Greetham has performed a complete U-turn and cut his exposure to equities, just three months after propping up his stock and commodities exposure.

Greetham took advantage of the initial dip in the markets back in March to add to his position in risk assets. However, he says concerns over another global economic recession have prompted him to reverse this move and become more defensive. 

"Since the financial crisis hit five years ago we have been stuck in a period of short, boom/bust economic cycles with the upswings very much reliant on stimulus from central banks," he said. 

"It’s a time when diversification across a broad range of asset classes including government bonds and gold works extremely well."

"It is also a time where there are opportunities for tactical asset allocation."

"I am hopeful central banks will ease soon because inflation is dropping but the markets will probably need to pressure policy makers to act aggressively. In the meantime it makes sense to be defensive."

A number of fund managers increased their exposure to risk assets in the first quarter of this year, following the strong performance of equity markets between November and March.

However, in the last three months or so, renewed tensions in the eurozone have seen many of these early gains wiped out. 

Performance of indices over six months

 

Source: FE Analytics

In a recent interview with FE Trustnet, JOHCM’s Ben Leyland pointed to the industry’s obsession with chasing short-term trends.

Commenting on Europe and the US, Greetham claims policy makers remain reluctant to take the action that is ultimately needed. 

"The euro area needs to turn itself into a kind of United States of Europe," he said.

"There is strong political opposition to the changes that will be necessary both from core countries that don’t want to transfer funds to weaker areas and from peripheral countries that don’t want to give up control over their economies."

"It will take years, with periodic moments of crisis forcing politicians to take decisions they do not want to take." 

"In the end we need to see more sharing of burdens, by way of intervention, euro deposit insurance and common bond issuance, and we need more growth."

"Policy should aim to inflate the core, so inflate German wages, rather than deflate wages in the periphery, worsening their debt crisis. You can get these countries more competitive by making Germany less competitive." 

While in general Greetham’s equity exposure has come down, he remains relatively optimistic on the US.

"On the economic policy front it is the United States of America that is getting it right and our equity exposure is tilted heavily in their direction," he said. 

"The banks were recapitalised early, the Fed has been very supportive and the White House has opted to spread fiscal tightening over the medium- to long-term, against the advice of ratings agencies."

"And yet growth has been stronger, the housing market is showing signs of recovery and the US equity market keeps on outperforming."