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.
We have been warning about the dangers lurking in what had been tranquil markets for some time, and the last week or so has confirmed how real these dangers are. Many equity markets have fallen significantly, and investors have, for now, appeared to move into risk-off mode. This could be seen as an inevitable correction after a long, uninterrupted march upwards, but certain features of the sell-off merit closer attention. Volatility has been running at historically low levels and this has led to a large number of investors betting that this would remain the case (the ‘short volatility trade’). Once markets changed direction, there was always going to be an exaggerated response as these investors struggled to hedge their positions. The sheer speed of the declines shocked many (though we have seen similar before) and computerised, algorithmic trading will inevitably get some of the blame for exacerbating the declines.
What triggered this is debatable; the surprisingly robust wage growth numbers from the US last week had certainly created jitters over inflation and the Fed’s likely response to it. Bond yields have been moving steadily upwards and we have written before of the dangers this poses as equities suddenly become relatively less attractive. Still further, we have a global financial system that is built around a virtually zero-interest-rate world, and the potential for rapid shifts in positioning is significant. Even yesterday’s relatively modest ‘forward guidance’ about a slightly steeper rate rise in the UK, not now but perhaps in May, created nerves for investors, and confirmed our thinking on gilts being return rather than risk-free at their nonsensically low yields in this environment.
For now we are not expecting a continuation of the trend that has taken hold to lead to a more extensive collapse in markets. A correction has been long overdue, and the fact that it has taken such a dramatic form should not blind investors to how far markets have come. However, what it does show is that investing in these markets means contending with complex technical factors and rapid developments that are difficult to respond to swiftly. All this makes long-term caution all the more essential for safeguarding portfolios, and we continue to be engaged in markets whilst being fully cognisant of the risks this presents. Our specialist allocations are generally of a defensive nature and these holdings (in areas such as healthcare and global insurance) have combined with our exposure to gold and absolute return strategies to provide support for portfolios in this time of acute stress.
The puncturing of investor overconfidence and complacency may ultimately prove to be no bad thing. Meanwhile, we remain ready to be flexible, whilst maintaining our discipline.
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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