The global economy is at risk of slipping back to the 1970s – a period of stagflation and recession – according to Artemis’s William Littlewood, who warns that Trump’s stance on protectionism is “discouraging”.
As such, the manager has kept his £830m Artemis Strategic Assets fund cautiously positioned, having gradually reduced its equity weighting while shorting gilts as well as Japanese, Italian and French government bonds.
He says that, while the EU referendum result and Trump’s victory appear to have extended the economic cycle in the US, the next recession is inevitable even if it has been pushed further out. 
“In the UK the depreciation of sterling has boosted exports and reduced imports. Consumers and investors are already spending more of their money at home than abroad,” Littlewood (pictured) explained.
“In the US Donald Trump seems to have re-energised businesses. Animal spirits have been unleashed and confidence is high. Trump’s views on trade might have more serious ramifications.”
The manager points out that, in the US president’s inauguration speech, he declared protectionism will lead to great prosperity and strength. Trump also said that the wealth of the US’s middle class had been ripped from their homes and redistributed elsewhere.
Littlewood warns that, if Trump stands by these controversial views, the US and the rest of the world will ultimately be worse off and that his stance is contradictory to economic theory.
“We have yet to see how protectionist Trump will be, but the early signs are discouraging,” he said.
“Protectionism reverses globalisation, will dampen economic growth and increase inflation. We are in danger of slipping back to the 1970s.”
Littlewood isn’t the only manager to worry about Trump’s stance on protectionism. One area of the equity market that could be particularly hard-hit by trade tariffs is emerging markets, given that many regions in the sector rely on the exportation of goods to developed countries.
James Donald, who heads up the £1.1bn Lazard Emerging Markets fund, told FE Trustnet earlier this week that protectionism will be the biggest headwind for the market area this year, if Trump’s policies are as protectionist as his election campaign suggested.
“Our biggest concern with Donald Trump is if he was truly protectionist,” he said. “I think if he puts in true protectionist measures that would be negative for emerging markets and I think it would be negative for the US. It could bring about stagflation globally, which would not be a good situation at all.”
While the MSCI Emerging Markets index has indeed faltered since Trump’s election in November, the S&P 500 index has since risen by 11.02 per cent in dollar terms as investors prepare for the prospect of growth-boosting fiscal expansion.
Performance of indices since US election 2016 in US dollar
Source: FE Analytics
However, Littlewood is less optimistic than the broader market. His net equity position fell from 36.1 per cent to 35 per cent throughout the course of January and the fund’s cash weighting currently stands at 20.8 per cent.
The manager says there are a number of reasons why his exposure to equities is becoming increasingly cautious, many of which are not new for the investment team on the fund.
“First and foremost is fear of a sovereign debt crisis and any repercussions from such an event,” he said. “Secondly, the next move in interest rates is likely upwards; and depending how high rates might climb, equity markets might take fright.
“Thirdly, there will be a recession again in the developed world. Although Trump seems to have lifted animal spirits, possibly deferring the timing of the next recession, the last one was nine years ago and these events are cyclical and unavoidable.”
Artemis Strategic Assets’ largest long equity positions are currently Just Retirement Group, Lloyds Banking Group and US private equity firm KKR & Co LP. In terms of regional exposure, 71.4 per cent of his equity weighting is in the UK and 16.2 per cent is in the US. He also has very small weightings in Japan, Germany, Switzerland and Canada.
Within fixed income, Williams warns that real yields are still negative in many parts of the developed world. For instance, he says inflation in France is 1.4 per cent yet their 10-year bond yields are only 1 per cent. In Germany, inflation has reached 1.9 per cent versus a 0.4 per cent yield on a 10-year bund.
The same pattern can also be seen in the UK, where 10-year gilt yields are at 1.4 per cent while inflation is at 1.6 per cent.
“Some economists are predicting inflation of 4 per cent in the UK by this summer. Wages are picking up across the developed world, job vacancies are at record highs in many countries and unemployment is low,” the manager continued.
“Given the economic data, it is hard to understand why so many central banks are still printing money to stimulate their economies.
“It is harder still to understand why bond investors willingly lend money at real negative yields. Bond yields in France and Italy have also been rising in response to the deteriorating political backdrop.”
Performance of indices over 10yrs
Source: FE Analytics
Another challenge the European fixed income space will have to contend with, according to Littlewood, is the possibility of some countries abandoning the euro.
“A currency union without a common language, with varying long-term growth rates and incomplete labour mobility can only survive in the long-run if there is political union and agreement that the wealthy countries will offer financial support to the poorer ones,” he warned.
“With the rise of populist parties, any such agreement looks less likely than ever. It is difficult to predict exactly how political change will unfold in Europe.
“It is much easier to predict that the status quo will change. We continue to believe that bond yields across the world are far too low.”
Given this tenuous backdrop, the manager only holds short fixed income positions, 61.9 per cent of which are Japanese government bonds. A further 14.3 per cent of these shorts are in Italian bonds, 13.7 per cent are in French bonds and 8.2 per cent are in UK gilts.
Since its launch in 2009, Artemis Strategic Assets has returned 90.91 per cent compared to its FTSE All Share benchmark’s return of 132.15 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
However, it has done so with a comfortably lower annualised volatility, maximum drawdown (which measures the most money lost if bought and sold at the worst possible times) and downside risk ratio (which predicts a fund’s susceptibility to lose money during down markets) over the same time frame.
Artemis Strategic Assets has a clean OCF 0.86 per cent.