Cautious Littlewood dumps RBS and halves Lloyds

Artemis’ William Littlewood has urged caution over the equity rally in the view it could soon lose steam, leading him to halve his exposure to Lloyds and almost completely sell out of RBS.

The manager of the £815 million Artemis Strategic Assets fund , who has taken his net equity position down to 54%, believes equities will ultimately be hindered by the sluggish GDP growth globally, which is reflected in ‘barely growing’ corporate earnings.

However, he said that more importantly, ‘none of the issues that worried investors over the last few years have been fixed.’

He said: ‘European banks still need re-financing and the peripheral countries are still desperately weak. Chinese growth appears to have stabilised, but there are questions over their banking system. The US may have temporarily avoided the fiscal cliff, but these problems will resurface.’

Consequently, Littlewood has sold companies whose profits are more correlated to equities, causing him to cut down his holding in Lloyds by a half and nearly completely sell out of his position in RBS.

Overall, the manager has cut his equity holdings over the last month, with his gross long position falling from 69% to 65% and his short position rising from 9% to 11%, taking the net position from 60% to 54%. 

‘Equities still look to offer compelling value compared with bonds, but only because bonds are greatly overvalued,’ said Littlewood. ‘Earnings-per-share forecasts have not been rising, so we are seeing equities being re-rated: that is, investors are willing to pay a higher price for a similar level of earnings.’ 

Will the equity rally last?

The reason equities and other risk assets have rallied, he argues, is because quantitative easing has driven government bond yields down.

‘Keynesians advocate more spending,’ said Littlewood. ‘This might have worked in the days when government debt to GDP levels was small, but given today’s levels of debt, this does not look like a viable solution.’