Investment Line is a regular bulletin produced by Mattioli Woods plc to provide an update on portfolios, a highlight of areas we are focusing on, and our thoughts on issues of the day.
The latest fear to manifest itself in markets is the prospect of trade wars. For good reason, this is probably the greatest overall concern at the moment. However, it leads a competitive field – inflation concerns remain high up the list given the implications of rate rises for markets as well as the related risk of a policy mistake by the Federal Reserve or the European Central Bank. A breakdown in the global growth narrative is also a persistent worry – even for those less cautious than ourselves – and the global economy isn’t going to get any better. There are other, more niche concerns to be wary of too. Until very recently, the technology sector was exhibiting bubble characteristics – for some investors this has been enough to spark comparisons with other historic periods of excess in the markets. Then there’s the structural features of its investment landscape (participation from ETFs, risk-parity and volatility strategies) – which leave markets vulnerable to magnified sell-offs in the event of a change of sentiment. As the cycle gets longer, so does the list of risks, and we are increasingly confident our more circumspect approach will be rewarded.
Sterling staged a rally this week as a 21-month Brexit transition deal looked like it could become a reality. However, we are struggling to see how the outlook has fundamentally improved. Theresa May will have to confront the divisions in her own party, while also tackling the potentially problematic issue of the Northern Ireland border and the customs union. Aside from this, domestic economic challenges look well established. Inflation may have softened but UK wages now seem to have some momentum, which strengthens the case for a rate rise in May. Retail may be considered something of a special case, but the problems in this sector are to some degree a reflection of the UK consumer’s fragility – Carpetright, Moss Bros, Mothercare and Kingfisher can now be added to the long list of casualties. The UK housing market is finally starting to show weakness, with price falls rippling out from London – the overall feel is we are somewhat “up against it”. It is difficult to envisage any news materialising that would lead to us increasing UK equity allocations in the foreseeable future. However, as always, we remain flexible.
Having completed the necessary fund research, we will be initiating portfolio positions in technology. Any “delay” in this has been somewhat fortuitous given the damage inflicted on the wider space in the last week – Facebook, for one, has come under investigation in the fall out from the Cambridge Analytica scandal, reminding investors regulation of “big tech” is on its way. Additionally, we have seen Uber pull its automated car project following a fatality, while the EU is planning to tax digital media companies on revenues at the physical point of sale, which could exacerbate EU-US trade tensions. This has been enough to spook investors and lead to some material price declines. We are happy to take cheaper entry points for our investments, while the long-term growth prospects for the sector are undimmed. Our exposure will be broad across technology sub-sectors, using the best managers in the space.
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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