Investment Line is a frequent investment bulletin from Mattioli Woods plc. The communication presents an update on funds, highlights some of the areas we are currently focusing on and our thoughts on the issues of the day.
Risk assets have experienced an extraordinarily volatile February in a continuation of the uncertain environment, which has prevailed since the start of the year. After initially greeting the suggestion of negative interest rates in Japan as a sign that monetary policy would continue to be supportive, markets began to worry about the implications. The very concept of negative rates shook the global banking sector as it is a threat to the industry’s net margins, and it left market commentators wondering whether central banks might be reaching the end game – cut rates to boost the economy but damage the banking sector in so doing. The European banking sector came under tremendous pressure and reignited all the old concerns about the relationship between sovereign debt and the banking sector. This hammered markets, which started to look oversold in the short term, and the likelihood of further accommodative policy (not least from the US Federal Reserve) created a significant rally in asset prices. The recovery in the oil price has also been helpful in this process, but it feels more than ever that markets are dependent upon the credibility of the central banks. It may be that a coordinated effort – possibly in the form of fiscal stimulus – might be needed to drive the global economy forward from here. For now though, investors can take comfort from the fact that the US and UK continue to enjoy positive economic growth rates, equity valuations are less challenging than they were and assets still seem to have the support of policy makers.
Although we remain long-term believers in the China story, there are substantial unknowns not least as to the state of the banking sector. It is true that the country has substantial reserves, but any meaningful write down of non-performing loans in the space would quickly impact here. Some commentators have started to become concerned about the likely impact on banking systems in countries like Singapore, and there are reasons to be cautious. If the Chinese were to allow their currency to fall further, this would start to place significant pressure on the other regional players and would be likely to cause other currency devaluations. Asia remains one of the most exciting areas of the world on a long-term view and we have substantial allocations here especially when viewed in conjunction with our China holdings. On a tactical basis, we are reducing Asian exposure in our balanced portfolios until we have more clarity on how the global macroeconomic forces will affect the region in the shorter term.
Concerns over Brexit continue to mount as we now have a firm date for the “In–Out” referendum. We will no doubt have numerous opportunities to write extensively on this subject over the coming months, but, for now, it looks as if the British electorate will vote to remain in. Nonetheless, uncertainty remains and we would expect to see as much volatility in the polling as we have in wider equity markets to date. There are arguments over the economic advantages and disadvantages of leaving the European Union, and the issue of whether true sovereignty is preferable to greater influence in Europe is also a real one. Sentiment is vulnerable to idiosyncratic events such as the Paris terrorist attacks, which focus attention on issues such as immigration rather than the wider debate. Currency is likely to bear the brunt of any uncertainty and this does leave sterling denominated assets vulnerable to sell-offs as foreign investors look to remove this risk from portfolios. The UK economy seems to be doing reasonably well and given the anaemic global growth affecting large cap companies, we feel that smaller companies more dependent on the UK for their earnings will continue to be relatively robust and have added to holdings for balanced investors.
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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