Global Equities
Equity markets still look somewhat divorced from reality at this point. January’s strong performance formed part of a three-month rally that looks overdone to us. It is true the economic data is mixed (this has allowed the bulls to argue for a more positive outlook) but it is worth asking what investors actually want. If they want a policy pivot from the Federal Reserve, then are they comfortable with the weaker economic backdrop this probably requires? If avoidance of a recession (or at least a steep one) is the priority, then can they live with rates staying higher for longer? Markets seem to be priced for the almost perfect outcome of rates coming down, inflation falling away and the economy remaining strong. It just feels overly optimistic/unrealistic. The job market remains very robust and this has started to worry some in the rate reduction camp, as there is the real possibility that if employment keeps inflation stubbornly high, then rate cuts will not materialise until next year. Remember though that employment is a lagging indicator, and it may well be that we see some weakness as the economy slows – the retail, housing and manufacturing data certainly suggests it will. In truth, the economic data is a mixed bag, as indeed are earnings, where we are seeing some pressure on sales and margins, but some industries are holding up well. It is a puzzling picture but, as long as valuations seem to be pointing towards an overly optimistic outlook, we are comfortable retaining our cautious stance.
Geopolitical developments are also causing a bit of a reality check at the current time. The tensions around the alleged use of Chinese balloons to spy on the US is not going to help relations between the two countries and it feels as if changing the direction of travel is going to be very difficult on this front. Meanwhile, the war between Russia and Ukraine is showing no signs of abating. Further offensives from Russia are expected and there is seemingly no real negotiation process underway that could lead to a ceasefire. These geopolitical issues and uncertainties cannot really be planned around in terms of asset allocation but do justify an extra degree of caution given the potential impact on investor sentiment and the importance of remaining agile.
Equities – Latin America
Though we are of a cautious disposition, we are also opportunistic when it comes to realising returns for investors. We are also always on the lookout for niche opportunities given the current challenges. Latin America is an area that has recently come into focus for us; an idea for the adventurous only. Political risk is a persistent feature here but as they say, everything has its price. And what a price! Valuations are incredibly attractive – Brazil trades at around 7 times earnings as opposed to wider emerging markets on nearly 12 times and the US on 19! It beat most equity regions last year given its exposure to the commodities and materials space and is poised to benefit from China reopening. It also offers the chance to take advantage of reshoring by US manufacturers to areas like Mexico. Indeed, the region looks well placed in straddling the fortunes of the two economic superpowers. This is not to mention the opportunities in the green energy space, given its rich commodity supplies and favourable demographics. Only for high-risk investors for sure but we have been sufficiently convinced to make a small allocation.
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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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