Investment Line is a regular investment bulletin produced by Mattioli Woods plc. The communication provides an update on funds, highlights some of the areas we are currently focusing on, and our thoughts on the issues of the day.
Having been promised 'strength and stability', we seem to have been left with pretty much the opposite. At the time of writing, it looks as if the country faces a UK minority Conservative government ('working' with the Democratic Unionist Party) with the inherent uncertainty such situations bring. Such a position is never ideal, but the fact that it comes as Brexit negotiations are about to start is unhelpful. The result does, however, pose the intriguing possibility of a 'softer' Brexit. Any Remainers within the Conservative party can easily rebel and bring down a minority administration, so May has now gone from worrying about hardline 'Leave' MPs to fretting about those elsewhere in her party! This possibly 'softer' outcome to Brexit negotiations may well provide reassurance to the markets, prevent a much more serious fall in the currency (the pound has fallen around 2% against the dollar and the euro this morning), and potentially make UK assets more attractive to investors. It is already possible to detect a more measured tone on Brexit from some Conservatives, and the prospect of remaining in the single market could entice some back to UK assets. This said, the equity market will inevitably re-rate some of the domestically focused companies on the grounds of political stability (housebuilders and banks have been hit in early trading), and if it were not for the ongoing issue of Brexit, it would be reckless to pretend that a 'hung parliament' was a remotely market-friendly outcome. The possibility of a Labour-led coalition being presented with an opportunity to take power is causing further angst, adding to the general mood of uncertainty.
We went into this election cautious, both on the UK and markets in general, and this leaves us well placed to weather such developments. Concerns over Brexit and the UK economy meant that we have been underweight UK equities for some time. Although we have a conceptual preference for small cap names, even these, in common with their large cap peers, derive substantial portions of their revenues from overseas and so sterling weakness can even be helpful. We do have substantial UK commercial property allocations, but we review all elements of our portfolios continuously and are comfortable with our exposure here for now. Though the direction of sterling is difficult to be sure of, such developments demonstrate the importance of whether we should 'hedge' foreign currency exposure in portfolios or not - again something which we analyse on an ongoing basis.
Agility is going to be important here as anything which affects the tone of Brexit negotiations and the trajectory of sterling will be of relevance to how investors approach the UK. This sort of political development is yet another reminder of the importance of diversification and exercising caution in markets where so many investors have become blasé in their approach to risk.
Investment Line is written and edited by members of the Mattioli Woods Asset Allocation Team, 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 fall as well as rise, and investors may not get back the full amount invested. Past performance is not a guide to the future.
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