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 focusing on, and shares our thoughts on the issues of the day.
After the volatility induced sell-off in February and in March, equity markets enjoyed a strong rebound in April and regained much of the ground lost. Impressive corporate earnings in the US have helped and some of the geopolitical tensions appear to have alleviated for now at least. The last week has felt as if markets have run out of steam however, and the Dow Jones index has extended its losing streak to eight trading days. Market “breadth” is still narrow, with technology stocks leading indices and most other sectors being lacklustre. The US is clearly late in this particular market cycle, and each potential problem presents another reason for more risk-averse clients to reduce risk. Economic data remains strong, but Federal Reserve tightening of policy, the ongoing trade spat between the US and China and a host of other concerns make it feel as if market sentiment is cooling for now. We continue to be cautiously positioned against a backdrop of elevated valuations and the removal of easy US monetary policy. Portfolios continue to be well diversified, balancing participation in risk assets with those holdings offering protection in the event of adverse developments in markets.
We hinted we might be interested in initiating an exposure to US Treasuries last month, and we have now decided to act as there are opportunities to obtain a decent return from US bonds without having to take on too much interest rate risk. In a world where low risk, attractive yields have become extremely rare, short to medium dated US bonds are now firmly on investors’ radars and will enhance portfolios. Plus, diversification is something we constantly strive to achieve, and US Treasuries are an excellent vehicle to achieve this. There also seems to be enough on the horizon to worry about to mean US Treasuries could attract increased investor demand as a means of protection or “flight to safety”. A second’s reflection allows one to list a US-China trade war, an equity market stumble and even a US recession as possible catalysts for a fall in yields. We will fine tune our allocation to maximise the returns while limiting the sensitivity of the holding to rate rises from the Federal Reserve. We have been extremely wary of investing in sovereign debt for well-rehearsed reasons, but this is an example of where we will be opportunistic. Defensive and Cautious portfolios will see positions added with a passive instrument used, given the cost-benefit dynamics in the space.
Having outperformed last year, emerging markets remain firmly under pressure in 2018. Argentina and Turkey have dented sentiment, but their issues are really quite specific and the main worry is over the impact of the Federal Reserve raising rates, which nearly always spells trouble for the space. We are told constantly emerging markets are cheap but on a cyclically adjusted earnings basis this is not altogether clear as they are broadly the same as developed markets (though far cheaper than the US – isn’t everything!?). This said, any steeper sell-offs and panics will present opportunities and we are always looking to identify interesting ideas. In addition to our preferred areas of China and India, higher-risk portfolios will see some exposure added to wider emerging markets and even some frontier ones (those not yet qualifying as “emerging” under index classifications) as we see fit. The key is going to be identifying the countries whose currencies are not going to wilt under pressure and be able to withstand tighter US monetary policy or a possible US-China trade war. Not an easy task, but the rewards are there for the discriminating investor.
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.
Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.
