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 are increasingly looking for new, niche investment opportunities as many traditional asset allocation approaches seem inadequate in the current market environment. The Indian bond market definitely falls into this “new” category. We have focused our emerging market equity exposure on the areas we like – China and India – and it makes sense to extend this into the fixed income space. The Indian economy is heading firmly in the right direction and the health of state, corporate and household finances is much improved. The reform agenda is progressing well yet Indian bonds do not seem to reflect this positive outlook. Yields of around the 7% mark are available and there are possible catalysts to capital appreciation. The bond market has the potential to be included in more traditional bond indices, rating agency upgrades are likely and the central bank could even reduce rates as it continues to tame inflation. This is a difficult area to access for overseas investors but there are excellent specialist funds available and we feel this will give portfolios something a little different from the norm.
Oil has now slipped back into a bear market with Brent crude now down more than 20% from its most recent high in early January. The OPEC deal to cut production is seemingly powerless to stop the supply side effect coming from US shale where inventories are running at elevated levels. Sentiment is very negative and the development is reminiscent of the dramatic falls we saw in 2014. Geopolitical tension in the Middle East is not having the effect it once did though any serious escalation of hostilities between Saudi Arabia and Iran would be a game-changer for the oil price. The falls have concerned some investors in the high yield bond space in the US where we could see contagion from stressed oil companies. This has certainly made us more cautious and the simplistic narrative of cheaper oil causing lower costs for business and therefore being a positive for markets should be largely ignored. Dramatic falls in the oil price create their own tensions and give investors even more reason to be circumspect – we have no direct exposure here.
China stocks have hit an 18 month high after the MSCI finally decided to include them in its global benchmark index after several disappointments. Mainland Chinese shares (A-Shares) will be included which means that funds which track the index will now purchase the stocks. This will clearly have an effect on the Chinese equity market as evidenced by the short term price movements but this is very much the start of a long process. The companies going in to the index will only be included at 5% of their market cap weighting so it will be a gradual process before they are “fully included”. Still, this will be seen as a positive and the inclusion should encourage the further “maturing” of the Chinese market. Challenges undoubtedly lie ahead for China - developments such as these show that there are catalysts in the space and we continue to have faith in our exposure here.
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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