Extreme monetary policy and sustainable growth have lulled investors into a false sense of security as we had into this year’s final quarter, according to Carmignac’s Didier Saint-Georges (pictured). 
The managing director and member of the investment committee at the firm has taken the decision to tactically raise the level of caution across portfolios, given the number of looming headwinds on the horizon over the near term.
In fact, he says there could be another “Minsky moment” on the cards – a significant collapse in asset values following prolonged periods of stability and increased risk-taking, named after economist Hyman Minsky.
“The start of the great financial crisis of 2008 has frequently been described as a ‘Minsky moment’,” Saint-Georges said in Carmignac’s latest investment note.
“Although we do not wish to overemphasise any similarities with the current situation, it has to be said that since 2009 the use of unorthodox monetary policies has meant that fixed income and equity markets have performed strongly, while showing utter indifference in the failure to relaunch economic growth and reduce debt levels.
Performance of index since 2009
Source: FE Analytics
“In the absence of any improvement in the real economy, this bull market phase has led to growing popular discontent, weakening incumbent governments.”
He explains that the continuing use of ultra loose monetary policy has emphasised the disparity between those who have fallen victim to feeble growth and those that have benefitted from rising markets, therefore exacerbating the political debate when it comes to improving global economic growth.
Saint-Georges makes reference to a study from US PR firm Edelman, which found that the difference in confidence in political institutions between the wealthiest 15 per cent of the population and the remaining 85 per cent is wider than ever.
While there is a difference of 12 points (referring to the firm’s ‘Trust Barometer’ index) globally, he says that the disparity is greatest among US citizens at almost 20 points, followed by the UK at 17 points and France at 15 points.
Given that this is the highest gap the company has ever recorded, Saint-Georges warns that the likelihood of extreme policymakers gaining power is far higher than it has been over the last 12 months or so.
“The election of a candidate like Donald Trump as president of the United States, which was close to unthinkable a year ago, now looks plausible,” he warned.
“A majority of the UK population voted to leave the European Union and populist parties are gaining ground throughout Europe. The markets’ tranquillity conceals both economic and political fragility.”
Saint-Georges says investors have become used to a sustainable, albeit low, growth environment and the market’s rally after the EU referendum results were announced has placated investors even further.
Performance of index after 23 June 2016
Source: FE Analytics
Markets also performed strongly immediately after European Central Bank president Mario Draghi announced an expansion of its bond-buying programme back in March, suggesting that loose monetary policy has been serving as a comfort blanket for investors and has minimised the impact of surprise political outcomes so far.
As such, the managing director says that investors have been largely unflustered when it comes to the impending US elections next month, Italy’s referendum on 4 December and the Federal Reserve’s Open Market Committee’s (FOMC) meeting on 14 December, which could lead to a rate hike.
“From our standpoint, as we move into this year’s last quarter, it makes sense to tactically raise our level of caution as regards market risk,” he added.
In terms of positioning, Carmignac has scaled back its equity exposure over the last month to lock in some gains made at the end of June.
That said, the firm’s thematic positioning is mostly unchanged and still adopts a focus on companies that offer both growth prospects and visibility. One change made was the sale of US agrochemical company Monsanto, which undertook a complex merger with German chemical firm Bayer and is still in a phase of negotiation with regulatory bodies.
Over in fixed income, Carmignac’s positioning is also largely unchanged, maintaining an emphasis on benefitting from yields from emerging market sovereign bonds and European corporates in the banking sector.
Generally speaking, the firm has a fairly muted positioning in US fixed income, given the risks surrounding a potential rise in inflation.
“Quite possibly, investors will continue to be satisfied with sluggish economies flooded with liquidity,” Saint-Georges continued.
“Moreover, leading indicators for the global economy may continue their recovery, which started in the spring of 2016, for a few months longer (although our own analysis suggests otherwise).
“But risk management means being particularly vigilant in moments of fragility. Minsky’s analysis would have seen that the assurance of extraordinary support from central banks over several years has led both fixed income and equity markets to unstable levels.
“Both asset classes have become vulnerable to external shocks, as already confirmed by ‘Minsky mini-moments’, in 2013, in the summer of 2015 and at the beginning of 2016.”
Performance of indices over 5yrs
Source: FE Analytics
The managing director warns that three more market shocks could well happen before the end of the year is even over. He also points out that Carmignac’s macroeconomic expectations are that the market could be disappointed by global growth levels.
He added: “To address this fragility successfully, we think it wise to take a tactically more prudent stance on both equities and bonds.”