James Inglis-Jones

Why we’ve raised our net exposure

James Inglis-Jones

The fourth quarter of 2018 was a fairly painful one for markets. Concerns about higher global interest rates, an escalation in the US-China trade war and weak global growth kept investors on edge and resulted in significant declines for equities. However, since the beginning of 2019, our trend indicators have signalled that the tide has turned.


When managing a long/short fund, where we make calls on the stocks which will fall as well as those which will rise, it is essential to keep your ear to the ground and be aware of signals from the market. Over the course of managing the Cashflow Solution process, we have developed a number of proprietary measures that determine the size of our long and short books within the Liontrust GF European Strategic Equity Fund, and therefore our net and gross market exposure.


Recently, we have scaled up our net market exposure to 67% from 35% at the beginning of the year as we saw a recovery in the technical indicators we monitor. The downtrend triggered in October of 2018 shifted to a more uncertain picture in January and at the end of March into an uptrend. This benign development was not just confined to Europe, with a number of markets globally recovering their poise.


This was a result of some moderation in the key factors weighing down stocks in the last three months of 2018. Central banks made a U-turn on their policy stances and there is now greater expectation of interest rates being cut, rather than raised. In spite of widespread fears of a trade war, the US and China have kept tariffs on hold for now and are instead negotiating a trade deal. A market rally has ensued, with the MSCI Europe returning 17.1% year-to-date*.  


Simultaneously, there appears to be a degree of scepticism that this recovery in market momentum can be sustained. Our investor anxiety measure has climbed sharply from ‘Very Low’ to ‘Normal’. In our experience of monitoring sentiment, higher investor anxiety when combined with a market which is up-trending is usually positive for equities. It shows that investors are not being complacent about the duration of this rebound. There is evidence of this in the unusually strong performance of the defensive cohort in the market, which is often suggestive of investors who are worried about the growth outlook.


The absence of investor complacency, a corporate sector devoid showing low signs of overaggressive investment and the transition to an uptrend in Europe are all constructive features of the current environment, and reasons behind the increase in our net market exposure.


In addition, European valuations are also less troubling than they were last year – now in the fourth quintile of the historic range with the fifth quintile being the most expensive. However, it needs to be remembered that whilst valuations are not at excessive historic levels, they remain so in the US. This is only relevant in so far as technical measures need to be monitored closely. Markets can continue to make good progress on high valuations, but if a trend breaks and a market is very expensive relative to history this is usually a herald of a much more difficult outlook for investors.


*Source: Financial Express, 31.12.18 – 30.04.19, total return, euro terms.

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Cashflow Solution team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Liontrust European Growth Fund holds a concentrated portfolio of stocks, if the price of one of these stocks should move significantly, this may have a notable effect on the value of the respective portfolio. The Liontrust Global Income Fund's expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. 


The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Thursday, May 9, 2019, 3:19 PM