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William Littlewood: “The world is in a sorry state”

29 July 2016

The manager of the Artemis Strategic Assets fund explains why the continuation of ultra-loose monetary policy and angry electorates will continue to cause economic woes.

By Lauren Mason,

Reporter, FE Trustnet

The rise of far-right politicians across the globe caused by angry electorates, the continuation of monetary easing and the increased likelihood of an EU breakdown are set to bruise markets over the long term, according to William Littlewood (pictured).

The manager, who heads up the £743m Artemis Strategic Assets fund, has maintained a negative macroeconomic outlook for a number of months and, according to his latest factsheet, this view doesn’t look as though it will change any time soon.

In an article published last month, Littlewood said that current conditions were akin to the build-up of the Great Depression in the 1930s, given the high global debt levels, slowing growth and central bank intervention.

Since then, the UK has voted to leave the EU and concerns surrounding the stability of the bloc have increased.

While the manager doesn’t believe that a Brexit is bound to have a negative impact on the economy, he says the rise of the ‘angry electorates’ behind the vote is indeed a cause for concern.

“The month was dominated by the fallout from Brexit, a political outcome which will have an impact on economics. Over recent months and years, electorates have become more volatile and angry, mainly because of a perception that globalisation and immigration have hurt the average citizen. Hence we have seen the rise of Trump in America, Le Pen in France and unusual outcomes such as the Austrian presidential election,” he explained.

Performance indices since Brexit vote

 

Source: FE Analytics

“Investors’ response to Brexit was to seek safety by buying government bonds and gold. Globally, shares fell but then recovered their losses as investors began to anticipate more monetary stimulus. How will the authorities respond? In the UK, the governor of the Bank of England said “some monetary policy easing will likely be required over the summer.”

“Expect an interest rate cut at some point and possibly more quantitative easing.”

Littlewood believes that such monetary policy is likely to improve the short-term performance of shares and has subsequently increased his net equity exposure from 38 per cent to 49 per cent – most of this has been in UK stocks.

However, he warns that such experimental policy is likely to exacerbate problems in the long term and is therefore treating his long equity holdings as more of a strategic positioning.

One of the biggest problems with adopting loose monetary policy, according to the manager, is that it is likely to increase wealth disparity and anger electorates even further, thereby heightening geopolitical as well as macroeconomic risk.

“In Europe the ECB began buying corporate bonds this month and investors expect further monetary measures in both Europe and Japan. Arguably, QE and negative interest rates are part of the problem. They misprice money, misallocate capital and drive up asset prices, thereby accentuating already stretched income and disparities in wealth. This will not appease angry electorates,” he warned.


“One solution might be more targeted monetary stimulus. Expect the clamour to grow louder for some form of ‘people’s QE’. Perhaps ‘helicopter money’ is on its way. The world is in a sorry state.”

Listing the headwinds on the horizon for equity investors, Littlewood points out that any increase in interest rates will be detrimental for economies and governments have therefore adopted quantitative easing to appease electorates in a move he describes as “ever more profligate”.

On top of this, he says that the ‘leave’ majority vote in the EU referendum has paved the way for a breakdown of the eurozone, which has been further aggravated by governments doubling down on current policies and angering electorates even more.

“Despite this, when shares fell this month we added to them. As long as bond yields remain low, I expect shares to react well to further monetary stimulus. We will look to reduce these positions ahead of the next inevitable crisis,” the manager said.

Since the start of the year, the global-facing FTSE 100 index has significantly outperformed the more domestic-facing mid and small-cap indices as investors worried about the potential fall-out from Brexit.

Performance of indices in 2016

 

Source: FE Analytics

However, Littlewood has increased his overweight to UK domestics as he believes that a large number of stocks in the market area have been oversold.

“What impact will Brexit have on the UK economy and on companies? For the economy, uncertainty will probably cause both consumers and businesses to defer decisions. This will reduce growth in GDP and might even cause a mild recession. However, this will be mitigated by the fall in sterling which will increase tourism and make exporters stronger,” he reasoned.

“In the long run, much depends on how much access the UK gets to the single market. Some jobs will be lost to Europe. That said, there will be gains from the reduced levels of bureaucracy. Once out of Europe, the UK will not be forced to contribute to any financial bail-outs that look inevitable in Greece and probable elsewhere.”

“So while there may well be a short-term effect on the UK economy, in the long-run a good case can be made both for saying we are better off – or worse off – outside Europe. It is unclear to me which outcome will be the case.”

While he says FTSE 100 companies were always going to do well from a weaker sterling, he admits that the outlook for sectors such as housebuilding, retail and banks is murky, particularly over the longer term.


“In 1992, sterling fell sharply as it crashed out of the European Exchange Rate Mechanism. Most commentators were gloomy, yet the UK economy went on to prosper,” Littlewood continued.

“The stock market’s reaction is clear. The prices of many domestic stocks fell by between 20 per cent and 30 percent in the days after Brexit. Our two largest holdings, JRP and Lloyds Bank, both domestic companies, saw their share prices fall by 21 per cent and 25 per cent respectively over the month.”

“I think this is vast overreaction – and something the chief executives of these companies must agree with as they both bought stocks. This pattern was repeated elsewhere. In the five days after Brexit, 100 directors in the FTSE 100 and FTSE 250 bought shares worth £14.3 million.”

Throughout July, the manager’s largest purchases have included BT, Sports Direct, ITV and M&S, all of which have suffered significantly since the referendum results were announced.

Performance of stocks since referendum

 

Source: FE Analytics

“I do not believe the UK is in a bad position following the Brexit decision. Indeed, many of the issues revealed by Brexit are more prevalent in other countries, notably in Europe,” he added.

 

Over five years, Artemis Strategic Assets has returned 23.86 per cent, underperforming its sector average and FTSE All Share benchmark by 9.67 and 18.85 percentage points respectively.

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

That said, it has achieved a lower annualised volatility and maximum drawdown (which measures the most potential money lost if bought and sold at the worst times) than its benchmark over the same time frame.

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