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.
So-called ‘populist’ verdicts delivered by electorates in the UK referendum on EU membership and more recently in the US Presidential election have focused minds on political risk and left investors wondering where this phenomenon will next manifest itself. The answer will surely be somewhere in Europe. The Italian referendum on constitutional reform to be held on December 4th could yet trigger the resignation of Prime Minister Renzi, raising the prospect of a general election at which an anti-establishment party could gain the balance of power. On the same day, we have the Austrian Presidential election at which far-right candidate Norbert Hofer looks as if he may triumph. These political risks are very real and symptomatic of the ‘European Project’ being in peril. Very real symptoms for sure, but dwarfed by concerns over the French Presidential elections next April/May where Le Pen may yet be elected. She is anti-EU, anti-euro and her success would be potentially devastating for markets. If any more reason for caution were needed, we also have Dutch and German Parliamentary elections next year. Even if none of these political risks were to materialise, Europe remains hampered by structural problems and desperate for reform. Combining these economic concerns with the numerous political ones outlined above, we feel it is prudent to remove European equity exposure from the portfolios. This is a significant move, the urgency of which is explained by the impending Italian referendum, but we cannot construct a decent short- or medium-term case for European equities and believe cash can be better employed elsewhere.
The healthcare sector was subject to serious pressure going into the US election over concerns that a then likely Clinton victory would mean a more hostile environment. Following Donald Trump’s unexpected victory, the sector is now being seen in a more positive light and has staged something of a recovery. That said, valuations relative to the wider market are still below their long-term average, and the area is likely to attract investors who have been deterred by headlines relating to the Democrat drug pricing plans. There are some uncertainties relating to the new administration’s approach to Obamacare, but overall, the prevailing climate is much improved. The sector plays to long-term demographic trends and offers a relatively defensive type of equity exposure. The space offers a diverse range of large cap names who are established leaders in their field and small/mid cap names that are innovators in niche areas. This appears an ideal opportunity to broaden our use of the healthcare sector across all portfolios.
The fallout from triple Trumping of US politics has been significant and diverse in nature. Equity markets have been robust, choosing to focus on the possibility of a more pro-growth, inflationary policy agenda. Global bond markets have come under pressure as these expectations have filtered through and fed investor concerns, particularly over sovereign debt valuations. The dollar has appreciated significantly against most other currencies and some of the movements have been truly dramatic, but all-time highs on the US stock markets have provided a distraction for some. Investors have been forced to reassess their long-term positioning as the return of inflation and the possibility of higher interest rates is clearly a very big deal indeed for asset markets that for so long have been priced off such low-risk free rates. For us, some of the excitement over increased infrastructure spending and the re-energising of the US economy is overdone and probably premature. We do not feel the need to dramatically increase risk exposure in portfolios, but the inflationary narrative taking shape seems to have enough credibility to make us reduce our exposure to investment grade bonds and to add to gold.
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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