EQUITIES
A number of risks to markets have now been removed from investors’ minds, or at least from the forefront of them. Markets have certainly started to reflect this and become excited about the possibility of yet more stimulus being added (to the US economy, for example). For some, a stronger recovery is now inevitable and this, coupled with the possible emergence of some sort of inflation, means that equities are ‘the only game in town’. This is a fair enough position to subscribe to, but there are significant signs of ‘froth’ in many markets, if not outright euphoria. Though they are not necessarily bellwethers to any degree (and are very different), the ascent of Tesla and Bitcoin create memories for some investors of dangerous conditions that we have seen many times before. The technology space – though very different from what is was two decades ago – is looking richly valued and it is right to be cautious here. That said, there is a momentum that cannot be ignored, and we have decided to add some equity risk to our portfolios. We will still be underweight relative to some peers in terms of equity exposure, though this gap will have narrowed. This seems the sensible position given the undoubtedly improved outlook, but it also reflects some of the unknowns and definite risks that still litter the investment landscape.
So, which areas are beneficiaries? Well, the news flow in the UK has clearly improved on several fronts and our domestic market has become relatively more attractive than it was. Sure, challenges lie ahead, and the public finances look less than in peak health, but the valuation gap that has opened up with other markets has started to look increasingly unjustified. There was said to be value in UK equities compared to other markets a year ago – that gap has widened as a result of Covid-19. We are therefore adding to UK equities in portfolios for investors with greater appetites for risk. Europe is another region likely to benefit from the improved global economic outlook given its dependence on exports. Having added Europe to the most adventurous portfolios several months ago, we are introducing an allocation slightly lower down the risk spectrum.
FIXED INCOME
Investors have become concerned at the effect on the bond market of the stimulus plans that have been announced across the globe – not least in the US. The potential inflationary pressures that are (for some) bubbling under the surface are causing a degree of concern over US Treasuries. We have spent a significant amount of time discussing our exposure in this area though have not become convinced that a switch to inflation linked bonds is merited at this time – indeed, there is every chance that investors will flock back to Treasuries at the first sign of trouble. Corporate bonds look to be well supported against an improved economic backdrop and as long as rates don’t rise, defaults should remain low. We have introduced some convertible bond exposure in more cautious portfolios – part of our move to introduce a bit more risk but using those vehicles that have some of the protection offered by bonds too. The richer valuations around sovereign debt and the prospects of an inflationary shock naturally create an air of caution around the asset class, but for us there is still important diversification to be found here, though please never forget that there are risks in bonds as well as in equities.
Investment Line is written and edited by members of the Mattioli Woods Group investment committee and is for information purposes. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. The value of investments and the income from them can go down as well as up, and you may not get back the amount invested. Past performance is not a guide to future returns.
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