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 staged a recovery over the last couple of months, it looks as if oil may come under renewed pressure in the short term. The much heralded Doha talks between OPEC and non-OPEC producers failed to produce an agreement to freeze production, and prices quickly responded downwards. Saudi Arabia (in practice the “leader” of the OPEC group) said that it would not suspend output if Iran would not participate in the deal also – Iran had always said it was unwilling to so do given its attempt to recover market share following years of sanctions. Russia had given a pragmatic assessment of prospects for a deal in the run up to the meeting and, true enough, nothing of substance emerged. Global equity markets have owed a not inconsiderable portion of the recovery since mid-February to the bounce in oil and so this will naturally cause concern over general market support. A more positive spin on developments would be that the failure to negotiate a deal will allow for a more natural equilibrium position to be reached in the oil market. A short-term spike in the oil price on the back of a deal could have led to an incentive to increase production, which would have been counterproductive other than in the short term. We are minded to maintain exposure for now and still believe there will be a better opportunity to exit our positions in the medium term.
Blanket coverage of the event in the media has already left market watchers weary, but the “In/Out” referendum is fast approaching and uncertainty remains the order of the day. Markets appear to be attributing a very low probability to a “Brexit” outcome materialising given that equity markets have been steady of late. Recent polls have suggested it will be a close affair with some even pointing to a slight majority for the Leave campaign, but the bookies (who have a much more respectable track record in predicting such events) seem to be indicating around a one in three chance of the UK voting for “Brexit”. The effects would be many and varied – larger market capitalisation companies would be more hit by trade agreement disruption, but would potentially benefit from weaker sterling. Smaller capitalisation companies may seem superficially more “protected” from trade issues, but any resulting downturn in the domestic economy would hit them disproportionately. We will be monitoring political and polling developments closely over the coming weeks and if the prospect of an exit increases materially, then precautionary action may be warranted. Reducing UK equity holdings could however result in missing any “bounce” in markets following a “Bremain” verdict (if you would permit the term!) and any tactical change today seems a little premature.
Japan continues to present challenges to investors and after a difficult period in which question marks over the success of Abenomics have emerged following weak data, the country now has to contend with a(nother) major earthquake. This time Kumatomo in the South West of the country has been hit, resulting in over 40 people losing their lives and extensive damage to buildings and infrastructure. Though trivial compared to the human tragedy involved, there will be a material economic consequence from this natural event as Kumatomo is a manufacturing hub. Sony, Honda and Toyota have all seen production impacted and the Nikkei fell 3.5% on the news. In the long run, an event of this scale is unlikely to be a game-changer, but the recent strengthening of the yen, the issues surrounding negative interest rates and a weakening faith in the recovery story generally are concerning developments. No one ever thought the Japanese recovery story was going to be seamlessly smooth and it may indeed result in failure. For now though we are maintaining our overweight allocations in the expectation that the authorities will take further extraordinary measures to keep the “project” on track.
Investment Line is written and edited by members of the Mattioli Woods Group Investment Committee, and is for information purposes only. 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.
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