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.
Risk assets continue to be very much in ‘benefit of the doubt’ mode. We are still some way from seeing a convincing case for higher global growth, but investment markets remain buoyed by optimism. US markets appear to be in practically euphoric mode and are engaged in a seemingly endless move to greater and greater heights. This is happening in the absence of any real clarity on President Trump’s growth agenda, and very significant infrastructure spending and tax cuts are being built into valuations. We should know more soon – there is the serious risk of expectations being disappointed. One concern relates to time frames – just how long might it be before these positive effects are felt? Another relates to affordability. These plans have to get through Congress and although both Houses are now in Republican hands, President Trump will face opposition from fiscal hawks in his own party. This picture is complicated by the fact that the US debt ceiling limit, suspended fifteen months ago, expires on 31 March. Without a confirmed repeal of Obamacare, achieving consensus on more tax cuts and spending may be difficult to achieve, and these sorts of stand-offs actually led to a credit agency downgrade for the US back in 2011. If the deadline is missed without the ceiling being raised, then the US government would be using ‘extraordinary measures’ to meet its obligations. This is yet another uncertainty for investors. Maybe not everyone is as relaxed as the equity markets seem to be suggesting – safe haven assets such as gold and German bonds have been attracting flows over the last few weeks – and a more rigorous examination of the reflation/growth narrative may not be far away.
European markets also continue to seem relatively relaxed against a backdrop of very real political risk. All the polls suggest Le Pen will be defeated in a run off against Macron, but we have heard this sort of ‘reassuring’ thing before, haven’t we? There is also the intriguing possibility that the Left will put forward a united candidate to combine the votes for Hamon and Melanchon, which could be a ‘game-changer’. What if the second round became a contest between Le Pen and such a united Left candidate? That would really unsettle markets (neither eventual winner would be considered remotely ‘market friendly’), and the mere suggestion that it was a possibility led to a sell-off in French bonds relative to their German equivalents last week. If the centre ground candidates were suddenly ‘cut out’ of the race, we would likely face a severe market reaction come early May (round two of voting is on 7 May). For now, Macron is the clear favourite to see off these risks; there is still the nagging doubt that markets may face their fears of a Le Pen victory and the beginning of the end for the European Union. Meanwhile, Geert Wilders is extending his poll lead ahead of Dutch parliamentary elections in a few weeks’ time, and the possibility of an Italian general election being called this year has increased with the resignation of ex-Prime Minister Renzi as leader of his party. There is the sense of momentum building against the European Project and some kind of disconnect between the associated risks and current market valuations. Perhaps none of these risks will materialise in the short term, but they are real nonetheless and are not being reflected fully in equity markets.
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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