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.
Navigating the investment markets does not get any easier. Investors have a cocktail of issues with which to contend yet markets remain unperturbed by almost all developments. Equity indices have been almost tranquillised of late and the actions of central banks have bred a complacency that has resulted in record low levels of volatility. Still, things just don’t ‘feel’ quite as settled as this might suggest. Very low volatility is often a harbinger of challenging times ahead, and high valuations across assets contribute to a sense of unease. We have gone so long since a correction in the markets – might central banks be preventing the normal rules from applying? This appears to be the thinking of many investors and is contributing to keeping valuations elevated. Still, there is a feeling of drift at the moment with the possibility of tighter monetary policy possibly keeping a lid on further upward moves; markets certainly have some serious issues on which to dwell. The threat of conflict on the Korean peninsula is real and though a solution should be found, the possibility of a miscalculation is not to be disregarded. Relations between the US and China are already strained given the rhetoric over trade policies, and the newsflow regarding North Korea is very unhelpful in this regard.
Separately, political risk seems to be growing in the US with the debt ceiling negotiations in October likely to become the focus of investor worries soon. A government shutdown might not last that long (if it does indeed materialise), but as with the stand-off over North Korea, it is the potential catalyst for a change in investor sentiment that could cause short-term damage to markets. If enough market participants think a correction is due in the autumn (and it is a substantial group that does), this could become a self-fulfilling prophecy. Despite this, there are investors who are waiting for some sort of correction in order to put cash to work or who have had a painful last year positioned for market weakness, ready to buy when weakness does appear. Corporate earnings have been helpful so far, but valuations are sufficiently demanding to mean that they have to be – not much upside here. No doubt if any setback materialises, investors will hope that central banks will assist them with a slower pace of rate rises. As it has done for years now, this poses the difficult question of whether an otherwise potentially justifiable de-risking of portfolios is in itself too risky an approach in terms of missed opportunities. No wonder markets seem to be virtually inert other than a few days of volatility last week.
We have had long discussions about whether the balance of concerns justifies taking some precautionary action, and frankly we have come close to concluding that it does. However, at the moment we believe our already cautious approach is a sufficient response to the worries being presented by markets, though the months ahead could change this. Should we formulate a strong conviction in favour of further de-risking, then we have the agility to respond quickly and clients can be assured that we are never complacent about the risks posed to portfolios.
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.
Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.