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Equities are the only option for investors, says Liontrust’s Luthman

15 April 2013

The FE Alpha Manager does not think quantitative easing (QE) is a sustainable cure for the global economy, but sees no other asset class apart from equities worth holding at the moment.

By Alex Paget,

Reporter, FE Trustnet

The move in to risk assets as a result of quantitative easing is totally understandable, according to FE Alpha Manager Jan Luthman, even though the policy itself is not working properly.

ALT_TAG Notable market commentators, including the IMF’s Christine Lagarde, have warned in recent weeks that financial institutions have become overly dependent on central bank monetary easing.

Luthman, who runs the Liontrust UK Macro Growth fund, says equity investors cannot be called complacent, as investing in risk assets is the only choice they have.

"Investors are preparing for huge amounts of monetary stimulus and a prolonged period of artificially low interest rates. I don’t think there is complacency, it is an inevitable reaction," he said.

"It is starting to stoke inflation and that is worrying investors, but it links to the old adage – you should enjoy the party but dance near the door."

"There is a lot of cheap money sloshing around but it cannot be called complacency, as what else are you going to do?"

"You cannot hold it in cash; I think that would be the daftest investment decision. Investors need to be holding assets that have a degree of inflation or QE resistance."

"There isn’t a perfect way to protect yourself against imported inflation, but one way is to invest in equities. I wouldn’t say blanket equities, but UK-listed companies that derive the majority of their earnings from regions that aren’t debasing their currencies."

The manager cites the global consumer goods company Unilever as one that fits that description. According to FE data, the company makes up 3.14 per cent of his £93m fund.

Equity markets have responded positively to the stimulus packages. FE Analytics shows that the S&P 500 has returned 15.64 per cent since the Fed’s third bout of quantitative easing was implemented in mid-September last year.

Performance of index since Sep 2012


Source: FE Analytics

As a point of reference, the index returned just 2.26 per cent in the six months prior to QE3.

Luthman remains concerned about the long-term sustainability of the central bank intervention and does not think it is doing anything to promote GDP growth.

"The idea is that QE provides economic stimulus directly; in its current form, no it doesn’t," he said.

"What we have seen is that money is being created and used to purchase financial assets, which pushes up the price of risk assets."

"This, to a limited degree, brings a feel-good factor as investors feel they have become richer. Secondly, by pushing yields down, it lowers the hurdle for companies as the rate for borrowing goes down."

"It has the potential to feed through to the economy. The problem is: do people want to spend more? The answer seems to be no."

"The impact QE is having on the underlying economy is very diluted and I think it is one of the most regressive policies that has ever been implemented, as it enriches those who already own the assets but does nothing for the poor guy who just works to make a living."

Rather than stimulating the economy, Luthman says QE is simply a way for developed economies to become more competitive.

Luthman believes that investors are upping their exposure to equities because there is a general fear of inflation, not because they feel central banks will always provide some sort of back-stop.

"There has been a shifting of perception and the interpretation that quantitative easing in the US, Japan and the UK is going to continue, in order to push their currencies down against the emerging economies and other economies that haven’t debased their currency," he said.

"High-cost economies are determined to push down the value of their currency to price themselves back in to competitiveness."

"This a major shift, almost a once in a millennium event, where such a great section of the world is trying to price itself back into the market."

The manager says the only other way developed economies can make themselves more competitive is through a prolonged period of "colossal" unemployment until the average citizen accepts the only way to be in work is to accept half the salary they used to receive.

For obvious social reasons, he says this is an unviable alternative.

Luthman has run the Liontrust UK Macro Growth fund with fellow FE Alpha Manager Stephen Bailey since March 2002.

Over that time the fund is a top-quartile performer in the IMA UK All Companies sector, with returns of 194.43 per cent, beating its peers by 105.91 percentage points.

Performance of fund vs sector since Mar 2002


Source: FE Analytics

The fund has an ongoing charges fee (OCF) of 1.57 per cent and requires a minimum investment of £1,000.

Luthman also runs the Liontrust Macro Equity Income fund.

Robert Jukes, global strategist at Collins Stewart Wealth Management, says he is very concerned by the implications of the central banks’ stimulus methods, and fears a risk asset bubble could appear.

"Am I pleased to see that quantitative easing is being questioned? Yes," he said.

"We feel that markets have become overly reliant and overly focused on QE and we feel not enough time has been given to addressing the core fundamental economic uncertainties."

"We would like to see more time given to providing long-term economic stability."

"The dangers are that equity markets become increasingly imbalanced and that a bubble starts to develop in certain areas of risk assets."

"The central banks are buying time, but in the absence of longer term solutions a bubble could emerge."

"At that point, QE would be part of the problem and not a cure."

Jukes feels that there is a time and a place for central bank stimulus, but he feels that time has gone.

He commented: "We believe – and we think that academics are now coming around to this – that quantitative easing isn’t necessarily a replacement for demand-led stimulus. What I mean by that is QE in itself doesn’t create new demand."

"We believe that QE is most efficient in a stalling or falling and disruptive market, basically when everything is heading south. It gives politicians and policy-makers the time to figure out the underlying issues, effectively providing a floor underneath risk assets and therefore stability."

"In the UK, Europe and US, the central banks have been good at providing time for policy makers and politicians. However, what we have seen is that policy makers haven’t been good at addressing the root causes of the underlying issues."




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