Managing director Didier Saint-Georges said direct equity holdings in the firm’s Patrimoine fund were reduced to just 7 per cent in the third quarter, having been as high as 30 per cent earlier this year.
Although the vehicle still has other exposure to equities via derivatives, he said it had slashed direct exposure on the view that corporates’ failure to invest in their businesses was now about to catch up with them.
The outlook for US companies was of particular concern to Mr Saint-Georges.
The US investment cycle was “gathering more fatigue”, he said, and warned corporate margins were falling and output prices were under pressure.
He said: “I have never seen an investment cycle pick up when margins were under pressure.”
The managing director added that many companies had invested in financial engineering and share buybacks on the back of quantitative easing (QE) in the UK, the eurozone and the US, in lieu of investing in long-term productivity.
“But this has now reached its limit,” he said.
“All the [QE] support to equity markets is stopping, but the [lack of investment in] productivity has reduced economic potential. Growth is difficult because investments haven’t been made.”
Even though he was not as concerned as the consensus when it came to liquidity in particular areas of the market, Mr Saint-Georges was worried about a slowdown in global capital flows now that QE in the US had been tapered off.
Investors underappreciated the effect QE had on boosting this form of liquidity, he warned.
He said: “The whole liquidity picture is changing and markets are missing the bigger picture. When you combine this with the global slowdown, it’s a collision.”
Mr Saint-Georges said this cocktail of factors – alongside deflationary pressure caused by overcapacity in China being exported across the globe – was another reason to be cautious on equity markets.
He said the low-growth and low-inflation outlook for the global economy presented an investment scenario akin to that seen in Japan in the 1990s.
“[Japan] was easier because it was just Japan – now it’s the whole world. How do you make money in a Japan-like global environment?”
Carmignac’s Patrimoine fund has a total equity cap of 50 per cent, split between direct equities and derivatives exposure. It also holds a minimum of 50 per cent in bonds and money market instruments.
The vehicle typically uses derivative positions to hedge the risk of equity slowdowns by selling futures contracts on major indices.
But Mr Saint-Georges said this was not always the case. The portfolio had 46 per cent exposure to direct equities in 2009, just as the equity bull market began, but no hedges.
The fund has delivered 4.2 per cent in the past year against the average return of 1.2 per cent for the Investment Association Flexible Investment sector, data from FE Analytics shows.
Across three years it has returned 18.1 per cent versus the sector average of 25 per cent, having previously been hurt by emerging market exposure.