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.
Recent inflation figures coupled with comments from various members of the Bank of England Monetary Policy Committee (MPC) had led some to believe a rate rise in the UK might be closer than previously thought. This was a cause for concern rather than joy as the rise in consumer prices will impact already negative real wage growth and come at a time when economic uncertainty surrounding Brexit would make an interest rate increase especially undesirable. This meant that the dip in UK inflation back to 2.6% in June from a four-month year high of 2.9% came as something of a relief. The MPC now has some extra breathing space and at least in the short term the calls for a rate hike are likely to grow less strident. Let’s not forget though the possible inflationary pressures that might come from further sterling weakness. Brexit negotiations have hardly got off to a magnificent start and a sustained lack of progress here, coupled with political instability, means the currency could come under further strain. It is difficult to see the authorities wanting to tighten into economic weakness, but faced with meaningful inflation they may have to do something, perhaps reluctantly. Whether UK consumers have to contend with higher rates or higher consumer prices, they are likely to face a dose of ‘reality’ soon. Meanwhile, the Bank of England assured us just ten days ago that they are sensitive to the issue of inflation and that we should ‘expect them to overshoot the target for some time yet’.
Though markets may appear indifferent to it at the moment, political risk is growing in the US. It is difficult to describe the Trump administration as being in anything better than disarray, and it comes at just about the worst time possible. The ‘churning’ of staff and the apparent inability to contain the fallout from investigations over key figures’ links to Russia have created instability and markets might soon start to care. The failure to repeal Obamacare and the delay in tax cuts should be making investors acutely aware that Washington could again be facing gridlock. Politicians need to get both a Budget approved and the debt ceiling raised in the autumn, and the risk is that these negotiations become a synthesis of all the separate policy stand-offs between Republicans and Democrats and the various intra-party factions. At the very least we could get a re-run of the 2011 debt limit debacle, but if the market concludes that this is potentially ‘game over’ for the tax-cut narrative that has driven markets since last November, the ramifications could be significant. Plenty of drama and entertainment to come no doubt, but acknowledging the risks that these developments pose to investors is our main focus..
Domestic inflation numbers are out this week and are expected to show the cost of living rising at the fastest pace in three and a half years. Energy bill increases and a rise in air fares are expected to be the primary culprits for driving up the CPI to the 2.6% level – the highest since September 2013. Most experts now think the 3% level will be breached this year, though few think we will see a rate rise until the end of 2018 at the earliest. The fall in sterling post the Brexit vote has clearly been a contributory factor here, and the strengthening of the pound following the announcement of the General Election has eased inflation concerns for some. We still have little feel for how the Bank of England will respond if inflation materially takes off – just how constrained will Mark Carney and the MPC find themselves by the indebtedness of the UK consumer and the housing market in particular? Inflation has not occupied investors’ minds for several years, at least not in the way it once did, but this could change. Brexit is going to be a painful process and the impact on the domestic economy is a severe unknown on all fronts.
It may be too early to declare the era of ultra-low interest rates over, but more hawkish comments from the Federal Reserve and speculation that the European Central Bank may start to taper its bond buying programme sooner than expected have led to upward movements in bond yields. Central banks clearly talk to each other, and the suggestion that there may be a ‘co-ordinated’ plan to move rates gradually higher is credible. Cynically, one could suggest that policy makers need to move rates higher to provide some ammunition for reductions in the event of another downturn and this, again, is plausible. We are reviewing portfolios for interest rate sensitivity – the debate over interest rates is far from concluded.
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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