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 appreciate that a lot of people are suffering from Brexit-fatigue; however, it is a very important issue that we are monitoring closely. We hope and expect that politicians will do the sensible thing and an agreement will be made, even if it is at a very high level with little detail, as it is in no-one’s interest for there to be ‘no deal’. A lot of what we hear is political spin, or media-led misdirection, with each side not wanting to look weak. There has been little substance, even before the Referendum in June 2016 (yes, it was that long ago). We have made very few changes to the portfolios over the last couple of years solely because of Brexit. This is due to a number of factors, including how sterling reacts, that could result in a positive or negative outlook for UK assets. We hold assets that benefit both ways, a stronger or a weaker sterling, so we have some protection. It is not that we have not been doing anything, more that we are content with our positioning, for now at least. There is a constant news flow, with some days having a positive market skew, then the next day a negative one. We have not been too concerned by this, nor by the protracted nature of the negotiation. After all, if there is a deadline given for anything in life, we all usually work to it and try to improve our position through negotiation until the last moment. Remember when you were at school – did you ever hand in your homework three weeks early? However, we are getting near the point when there needs to be some sort of agreement, probably by the year end, to allow time to draw up the required documentation ready for 29 March. We continue to watch and listen, and if we feel like we need to make a change to our UK assets, we will do so.
US equity markets have been the stellar performer over the last few years, with the S&P 500 rising by over 80% (in sterling terms) over the last three years to the end of August. However, since then, US equity markets have been on the slide, with the mid-cap focused Russell 2000 falling by around 11%, with a fall of more than 5% last week alone. That stress was caused by a couple of issues. One is the strength of the US economy, which might sound a bizarre reason for the US equity market to sell off. Jerome Powell, the Chairman of the US Federal Reserve, suggested that the economy was stronger than expected and that there is no reason for interest rates to be this low. This caused longer-term interest rates through the bond market to jump higher as the expectation was that short-term interest rates would have to be raised higher than expected to calm the economy from overheating. The ten-year US interest rate at 3.25% now looks quite attractive to investors and likely caused some to move towards bond markets and away from equity markets to benefit from the higher yield. There are also a few technical reasons why rising bond yields depreciate the value of equity markets. The reason why we are not significantly adjusting our portfolios is that the fundamental reason behind last week’s move was because of a stronger US economy, which we think over time will be seen as a positive. Our exposure to US equity markets is primarily through sector exposure, be it technology, insurance, healthcare or private equity, as we don’t particularly like the broader market; however, we do still like pockets, which are played through the sectors and themes mentioned above.
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.