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.
After another strong month for risk assets, markets started to soften as the inauguration of President Trump approached. This may be an instance of ‘buy the rumour, sell the fact’ where the market gets excited about an event, rises in anticipation of it and then ‘sells off’ when it actually materialises. Frankly, we always expected this – some of the new President’s policy agenda could undoubtedly help US stock prices – massive corporate tax cuts and increased spending are going to have some effect, but the bullish narrative has significant flaws. Even if Trump can get these plans through Congress in an undiluted form, higher bond yields are going to create a headwind for equity prices, and the market seems to be pricing in GDP figures around the 4-5% level against a backdrop of weak productivity and demographic challenges. The market is at some point going to worry about the effects of the strong dollar on US earnings, and the protectionist policies of the new administration – not least their effect on Sino-US relations – are a major concern. These are very real issues in an environment where the US President is seemingly at war with the country’s media – ‘alternative facts’ is the latest phrase to have entered the discourse – and investors are rightly feeling confused. The excitement over the tax and spend policies of the incoming administration could well drive the market higher in the short term, but for us an unpredictable US leadership constitutes another reason to be cautiously positioned in a world of elevated risks. We will continue to pursue an asset allocation strategy that properly reflects the risks involved in achieving returns for clients and doesn’t neglect the importance of minimising volatility.
We have written previously of how specialist allocations are going to become increasingly important. Given the challenges in finding value in mainstream markets, niche ideas that have their own performance drivers are going to be crucial in enhancing performance. We believe non-life insurance falls into this category. This is not a discretionary ‘spend’ for individuals and corporates as it is often required by law, and the area exhibits low correlations with other asset classes. Underwriting markets are stable, catastrophe insurance is of much lower importance than many think (it’s mostly personal and primary commercial) and market valuations are attractive relative to book values. Performance is typically counter-cyclical, and in difficult periods for equity markets, such as 2008/9 and summer 2011, the space held up well. The underlying investment portfolios of the companies means rising rates could prove beneficial, inflation can be passed on through higher premia and the inclusion of an allocation allows us to intelligently add more dollar exposure to portfolios at a time when we have reservations about the wider US equity market.
Oil has enjoyed a rally after its dramatic fall from grace in 2015 and early 2016, with the OPEC and non-OPEC deals of late 2016 providing a boost to the price. There is always reason to doubt whether these deals will hold given geopolitical tensions, and even if they do, the dynamic of US shale means we are likely to see a supply side reaction from higher oil prices. True, a more inflationary world could see commodities enjoy a strong run, but we feel the obstacles to further share price appreciation are significant. Having exited our positions for lower and medium risk clients last year, we think this is the right time to do the same for higher risk clients. Better opportunities exist elsewhere, and we will be funding our new insurance allocations from the proceeds of the sales.
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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