Italian elections ended in stalemate yesterday, with the possibility of a hung parliament now very likely. Equity markets have reacted negatively to the news, with the FTSE 100 down 1.42 per cent today at the time of writing. Luthman (pictured), co-manager of the Liontrust Macro Equity Income fund, believes the popularity of anti-austerity proponent Beppe Grillo suggests that European governments may have to rethink their fiscal policy; however, he believes markets are resilient enough to shrug off these worries.
"Europe is only 18 per cent of the global economy; much of the other 82 per cent is doing rather well," he said.
"Amazingly, China’s biggest trading partner is Europe, so if it were to get a bad cold obviously this isn’t helpful."
"However, I get the impression that the global economy is a lot closer to stability than it was three years ago, largely down to the restructuring we are seeing in the US."
Luthman says falling wages in the US, aided by developments in the shale gas industry, are allowing the US to price itself back into the competition.
"When the two main superpowers in the world start trading together again, it’s very encouraging for the wider global economy," he added.
When asked whether the FTSE could break through the 7,000 mark and reach an all-time high in the foreseeable future, Luthman said: "Yes, I think it could, but I think there will be a massive sector differential in terms of performance."
"We believe we are in the early stages of significant global expansion."
"Traditionally, investors have played this by investing in banks, but we’re looking to do it through asset managers, natural resources and companies that derive their earnings from fast-growing economies."
Luthman avoids banks in his two UK-focused portfolios. He points to the opacity of their financial statements as the main reason for this, which he says makes it impossible to know how much debt banks own, and just as importantly, who they are lending to.
While he does not think political unrest in Italy will cancel out the solid gains made by equity markets in the last six months or so, he says it reaffirms his aversion to banks.
"I wouldn’t say yesterday’s vote has changed our opinion, but it certainly reinforced the risks we see associated with the European banking system and European borrowers," he said.
Looking to the wider issue of eurozone sovereign debt, Luthman believes the Italian election result could signal a turning point for policy in the future.
"The popularity of Beppe Grillo is interesting. He’s very anti-austerity – indeed, he’s very anti-banks, which is even more worrying."
"The result shows that there is a limit to just how much austerity the electorate can take. There is a danger of some countries slipping into the 'ungovernable' category."
If the incoming Italian government fails to dampen levels of austerity, Luthman says industrial strikes and an explosion in black market activity would inevitably follow.
"You’ll get to the point where the electorate is spending more time looking at how to avoid tax than actually making money," he said.
"To be honest, I don’t think we’re far away from that in this country [the UK]."
Luthman believes that the restructuring of Italian debt – similar to what happened in Greece last year – could well be on the cards.
He commented: "Italy can’t devalue its currency because it doesn’t have its own central bank."
"I think we’ve just edged closer to the moment when Italy turns around to the ECB and says: 'the electorate can’t take any more austerity, we can’t pay this bill, so we’re going to have to restructure out debt.'"
Liontrust Macro Equity Income boasts top-quartile returns of 152.79 per cent in the IMA UK Equity Income sector since its launch in October 2003.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It is also a top-quartile performer over five years.
Recent returns have been less impressive: according to FE data, the £299m fund is third quartile over one and three years. Its lack of exposure to banks, which rallied strongly last year, has contributed to its underperformance.
"We’ve outperformed year-to-date, without any banks," Luthman added. "We just think there are a lot less risky areas elsewhere where we can play the global expansion theme."
The manager currently has 20 per cent in healthcare – a sector he told FE Trustnet last month could be "the hidden growth story of the next decade" – and 14.44 per cent in financial services companies.
He is also overweight miners.
Liontrust Macro Equity Income requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.56 per cent. The fund is currently yielding 3.19 per cent.
Luthman and co-manager Stephen Bailey also head up the £98m Liontrust Macro UK Growth fund, which sits in the IMA UK All Companies sector.