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.
We have focused our emerging market exposure on China and India, and still believe a focused approach is generally the most sensible course. The Federal Reserve policy tightening is already starting to take effect, and several emerging market currencies have been severely impacted – not least those of Argentina and Turkey. True, many of these countries have their fates determined by very specific factors, but the pressure on the space is starting to be felt. This said, there are areas other than China and India we may want to gain exposure to – select opportunities exist in virtually all geographies, and for more adventurous investors there may be interesting opportunities presented in the short to medium term. We do not like missing out on opportunities and even some very select, niche frontier markets (making even “emerging markets” look “emerged”) are starting to attract our attention.
Having not wanted to go anywhere near sovereign debt within the fixed interest space for several years, we are getting nearer to taking the plunge. US Treasuries are starting to offer investors a reasonable return and arguably look attractive again, certainly when compared to the yield on the S&P 500. The 10-year US Treasury yield is now sitting at 3.10% and even the 2-year is now offering around 2.60%. For investors of a cautious mindset struggling to obtain general diversification in portfolios, this move in yields might be tempting. Clearly there are risks – the US courts political risk at the moment and a loss of interest in Treasuries from foreign buyers would clearly not be helpful! A longer-term problem is the loss of faith in the dollar as a reserve currency. We are not decided yet on the asset class – we want to consider the correct way to play these developments, as getting the duration exposure right (just how much sensitivity one wants to interest rates) will be important. That said, we feel the time to introduce an exposure is getting closer, in what would be an interesting addition to fixed income exposure and funds generally.
At the time of writing, Brent is trading at around $80 per barrel in a remarkable reversal since its collapse from around this level in 2014. It is extraordinary to think that it fell as low as $30 at the beginning of 2016, and some analysts are expecting it to rise even further. Strong demand is contributing to the surge, but the predominant explanation is on the supply side. Iran is the key contributor here after the US withdrawal from the nuclear deal and the related re-imposition of sanctions against Iranian oil. Venezuela’s supplies have also come under pressure as the energy sector there has not been immune from the political crisis afflicting the nation. We have access to funds that can benefit from the rising oil price, but speculating on it at this level seems unsuitable for portfolios. Clearly the move in the oil price has implications for the global economy – it acts as a differentiator of the performance of the different economies we are exposed to, for one (will India be impacted, do oil-producing countries look more interesting? etc.), so, it is still a big deal!
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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