Slowing growth, high levels of debt, undervalued currencies and central bank intervention mean that “echoes of the 1930s are bound”, according to William Littlewood (pictured). 
The manager, who runs the £776m Artemis Strategic Assets fund, has been selling equities throughout May, having reduced his gross long equity position by 5 percentage points to 58 per cent over the last month.
Because the fund’s short position has remained the same, its overall net equity level has fallen from 43 per cent to 38 per cent, which is almost at the same cautious level the manager held back at the start of the year when the MSCI AC World fell by more than 11 per cent within the first six weeks.
Performance of fund vs index 1 Jan – 11 Feb 2016
Source: FE Analytics
While markets have since improved their performance, with the FTSE All Share returning 14.62 per cent since February’s sell-off, Littlewood remains cautious that there are plenty of headwinds on the cards as we head through the year.
“Over the month, equities reacted positively to the impact of China’s latest stimulus programme. However not all shares moved in the same direction,” he said.
“Commodity shares rose sharply, as did many cyclical companies. Shares in defensive sectors of the market performed poorly as investors switched to cyclicals. As usual, investors were terrified of not participating in a rising market.”
“I expect this latest Chinese stimulus to fail. Debt levels have ballooned again as the authorities attempt to revive the boom in capital expenditure. China does not need to build as many bridges and buildings as it once did. There are enough empty buildings, roads and towns already.”
The manager is now short base metal miners despite holding a long position in the sector two months ago. He has also reduced his weighting to oil and bank stocks and expects that the team will continue to sell equities throughout the year.
In terms of fixed income, Littlewood has long been short government bonds, despite the fact that many investors have piled into the asset class over recent months. Year-to-date, in fact, the IA UK Gilt sector has outperformed the FTSE All Share more than four times over, providing an average return of 7.4 per cent.
Performance of sector vs index in 2016
Source: FE Analytics
Despite his contrarian positioning, the manager has still managed to benefit from shorting government bonds – a position the fund has held over the long term.
Not only has he reduced long positioning in equities and retained a short position in bonds, Littlewood has also reduced his overall exposure to commodity currencies, ousting a long position in Malaysian ringgit, reducing long exposure to the Norwegian krone and increasing short positions in Australian and Canadian dollars.
He also has a short position in the yen, which he says dented the portfolio in May somewhat, but will continue to hold as he expects Japanese currency and bonds to weaken over the long term.
“The global economy is stumbling down a path that has become familiar. Growth is sluggish, seemingly not strong enough to satisfy either central bankers or politicians. Given the high levels of debt, they are terrified of deflation,” he said.
“Hitherto, they have been using unorthodox policies to protect economies from debt deflation. Interest rates were reduced to zero years ago. Huge amounts of money have been printed to buy government debt and other assets. More recently, some countries have introduced negative interest rates, arguably making deflation more probable.”
“These measures have generally been beneficial for asset prices. Government bonds are at all-time highs and low or negative rates make shares appear attractive by comparison, so their prices have been bid higher too.”
The manager believes that such policies have contributed to the increasing income and wealth gap, which has in turn caused members of the public to turn to “unorthodox” politicians for guidance.
This, he says, explains why Donald Trump has had success after winning the Republican nomination and why Austria’s two formerly most-popular political parties – the Austrian People’s and Social Democratic parties – to fall into fourth and fifth place respectively in terms of the candidates put forward in the country’s general election.
He says that this is particularly interesting, given that the two aforementioned parties have supplied the country’s president every year since 1945.
“Countries are desperate to maintain undervalued currencies. Governments feel under less pressure to run sound public finances. International trade is struggling and there is more talk of increasing tariffs, with steel the latest industry to concern politicians. Echoes of the 1930s abound,” Littlewood warned.
“Much modern monetary policy is a leap into the unknown. No-one knows how this will end: probably not well, in my view. This month, China’s latest stimulus has boosted markets and Greece is near to collapse (again.) We were sellers of equities this month and remain cautious.”
Since Littlewood launched the fund in May 2009, Artemis Strategic Assets has provided a total return of 63.36 per cent, underperforming its sector average and FTSE All Share benchmark by 8.18 and 31.61 percentage points respectively.
Performance of fund vs sector and benchmark under Littlewood
Source: FE Analytics
On an annualised basis though, the fund has outperformed both its average peer in three out of the last six years to the end of 2015. It is also in the second quartile year-to-date, having provided a total return of 1.46 per cent, which is largely in-line with both the FTSE All Share and its sector average.
Artemis Strategic Assets has a clean ongoing charges figure of 0.87 per cent.
