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.
The “Leave” vote in the referendum has acted as a catalyst for a further movement down in global bond yields. This trend was already well established as the bond market remains sceptical about the prospects for anything other than anaemic global growth. This has led investors to look elsewhere for attractive returns from sovereign debt and indications of a “gentler” pace of increase in interest rates from the Federal Reserve makes us more confident here too. Emerging markets are far from a homogenous group and there are excellent opportunities to buy government debt here at significant premia to their developed market peers (around 3.5% higher yields than on US Treasuries). Experienced fund managers can identify the more robust countries and make an assessment as to whether the best instruments to be invested in are making bond payments in hard (US dollar) or local currency. Both carry separate “risks” but the opportunity set overall looks attractive. Separately, a US recession looks unlikely and with some of the energy sector concerns seemingly calmed, high yield US bonds look like an attractive area from which to obtain decent yields. These changes will have the effect of giving us more US dollar exposure in portfolios without an increase in the still expensive looking US equities market.
The movements in UK stock market indices since Brexit have been dramatic and surprised many. Domestic focused companies have remained under pressure whilst large cap, multinational exporter stocks which can benefit from weaker sterling have done exceptionally well. The Bank of England has made supportive comments but it looks inevitable that we are going to see some economic weakness in the UK – perhaps not outright recession but something close to it. Against this backdrop we are not comfortable returning our allocations to their pre-referendum levels. The meteoric rise in select areas of large cap looks overdone and domestically focused companies look very vulnerable. We are making a reduction in our UK smaller companies exposure in line with this thinking and are now running with very low UK allocations, believing there are better opportunities elsewhere in the equities space.
Our conviction in small cap over large cap remains but we have chosen to skew this to a global exposure following the Brexit decision and the possible effect on domestic smallers. In many regions of the world, the same arguments we have made previously over market cap are relevant. Separately, we still like India and believe that the prospects for economic, legislative and structural reforms means that this remains one of the most attractive opportunities long term. True there are real challenges here – for example, manufacturing remains incredibly low as a percentage of GDP and the country has a persistent budget deficit. However, having introduced it to higher risk portfolios, we feel this is the right time to initiate positions further down the risk spectrum.
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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