GENERAL MARKETS
In essence, little is changed this month in terms of newsflow and trends in markets. The broad strength in equity markets is still in evidence and only question marks over the bond markets and higher yields seem to threaten the landscape. This of course is not something to be dismissed lightly; rising yields are a real concern and at the very least can lead to dramatic shifts in sentiment across sectors. Value has continued to look strong against this backdrop and some of the falls in the tech space (see Tesla) can certainly be described as significant. This change in style has benefited some markets more than others and the composition of some indices in the UK means that the change has been favourable here too. The effects of Covid-19 have been truly awful in so many ways, but the shift to fiscal policy and stimulus away from purely monetary may yet prove to be a major positive for societies and economies – in many ways the crisis has been used as cover for bringing forward change which may otherwise have been politically difficult.
It is fair to say that our confidence has continued to grow, as has that of others, and we are adding to equities in most portfolios. To a large degree this is being achieved through a reduction in cash positions. The increased risk appetite means that this is also an opportune time to reduce the uncorrelated strategies in some portfolios. The global growth story has been looking more convincing and this has resulted in our additions to global smallers, UK smallers and European allocations in various risk models. We still have plenty of insurances and protective holdings in portfolios should the trends in markets go into reverse. What might cause this is getting less obvious (we remain wary of vaccine-related shocks) and we feel it is right to be adding risk in a measured way, always with one eye on what could happen to threaten the prevailing thesis.
CHINA
We have meaningful exposure to China in portfolios, and this has served us well in the last year or so; that same exposure has been subject to significant debate. Some of this has revolved around ethical questions given the well-publicised “activities” of the Chinese government. Others have focused on the quality of opportunities available to shareholders. For many, the long-term story in China is sufficiently strong to overwhelm other concerns, and the country does certainly seem to be more in control of its own destiny than most. Recently, the government has been taking measures to address concerns over the amount of credit in their system, which is encouraging in many ways but has caused some investors to pause. Indeed, the Chinese market has come under pressure in the last month with A shares falling around 12% as other stock markets have continued to rise (interestingly, so has the Chinese currency). The indices have partly been affected by the substantial tech component, but this is not the whole picture. Regulators and officials have started to spread their influence over private companies (Tencent is a notable example) which has also unnerved investors. A mature approach to controlling credit might ultimately be good news, and create a more sustainable investor landscape, but more conservative aims from the leadership (on growth rates and employment) have also sucked some of the excitement out of the market. A sharpened focus on food and energy security and tech is designed to insulate China from supply chain issues and the awareness of leverage and debt in the system is also supportive of the equity story. This will probably mean headwinds for the stock market in the short run, but we remain engaged longer term.
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.
Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.
