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 euphoria that was detectable in markets has faced a reality check this week with President Trump seeing his healthcare reforms turned down by the House of Representatives. This has immediately put investors on alert as it throws into doubt whether the tax reforms promised will materialise to the extent hoped for and discredits the idea of a united, Republican controlled legislature. In short, things are not going to be as straightforward as the optimists had hoped. The US equity market in particular has been pricing in so much positive news that any hint of disappointment was always going to seriously threaten the established narrative, and we have seen the first meaningful drop in the equity market for some time. Whether this becomes something more substantial is as yet unclear, but the areas of the market that had most benefited from the Trump ‘reflation’ trade, such as the banks, have given up some of their gains and the dollar index has also retreated. Markets will be supported by the likely impact this will have on the prospect of the Federal Reserve ‘managing’ three rate rises this year, but given where equity markets are trading, it is difficult to take too much comfort from this. All eyes will now firmly be on the tax reform agenda and any reduction in its scope or a delay to implementation will be poorly received by investors. If anything, the political risks in Europe have abated though we still have an unpredictable French Presidential election to negotiate, and it feels as if the main news in markets will be the reinstatement or loss of faith in the US growth story. We are not reducing risk further at this stage, but it does feel as if our cautious positioning could well be rewarded soon...
Fixed income continues to perplex. Investors who would traditionally have had healthy allocations to bonds have been pushed into areas such as absolute return as they attempt to find a counterbalance to equity exposure in portfolios. The suggestion that the Federal Reserve will begin to steadily tighten monetary policy seemed to be the final straw for many, and sovereign debt and investment grade credit (those areas most sensitive to rising rates) became less attractive to many. There are a number of points against this view, however. First, President Trump’s failure to repeal Obamacare has now led many to question his ability to pass his ‘pro-business’/tax reforms in full, and this has led to a steep fall in the odds that the market gives to there being three US rate rises this year. Additionally, there comes a point when the higher yields available on sovereign debt and investment grade bonds actually make them attractive for asset allocators relative to equities. Relatedly, high yield continues to offer decent total return prospects with attractive yields, less sensitivity to rates and an economic backdrop that though challenged, looks OK. The bond markets have been written off before, and although it seems sensible to keep allocations low and focused, global events may mean that select exposure proves rewarding this year.
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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