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.
It is difficult to express in an original way the fact that US equities are expensive. Practically every metric we can find suggests overvaluation and this explains why we have been underweight here for so long. With political risk and Federal Reserve balance sheet tightening now firmly on the radar as well, we feel the time has come to make a further move. From already low allocations, we have asked ourselves just how much direct US equity exposure we want at these levels, especially for our more risk averse clients. We feel that the answer is none, and even for our balanced and growth investors we want less than we have had. Of course, there are risks to this positioning – maybe there will be a positive development on tax reform and repatriation of corporate cash – the balance of probabilities suggests meagre long-term future returns from the US equity market as a whole with the real prospect of a major drawdown in the interim. This is not to say that we are attempting to cut almost all US exposure from portfolios – we have specialist allocations in areas such as insurance and healthcare that have a US bias, but these are focused holdings and not a simple bet on overvalued US corporates per se. We have further dollar exposure in other asset classes of our portfolios too; a cautionary move feels merited at this point and goes some way to addressing our concerns for equity markets in general.
After enduring an extended period of weakness, the dollar is showing signs of life after the Federal Reserve stuck to its guns and maintained its plan for further rate rises. The bank will begin to trim its balance sheet, and the market is now expecting a rate rise in December. It looks as if the policy makers are willing to see through persistently low inflation prints to proceed with this approach, and the path of policy normalisation looks more established. This should not come as a great surprise, but some investors were wrong footed by the development having bet on the Federal Reserve becoming more cautious. Looking further out it looks as if rises are going to be limited, and this could provide crucial support for asset prices that have become so dependent on favourable monetary policy. True enough, markets have warmed to the latest announcement. Nonetheless, the willingness to take action is clearly there, and it will be interesting to see what sort of response we get if stimulative fiscal measures get passed in Washington. If we see quantitative easing as the defibrillator for the global economy, will President Trump yet prove to be the fiscalator-in-chief for the US economy? Markets might not be undermined by Federal Reserve policy as some had feared, but perhaps the tailwind it provided is now much weakened, and the question of whether underlying economic strength will compensate in supporting equities is now being asked. Let us not forget that speeches from members of the Federal Reserve now make regular reference to asset price valuations being elevated. Even if inflation stays low it might not be the greatest factor weighing on the rate setters’ minds – inflation did not reach 2% between 1996 and 2001, but policy was still tightened significantly (Federal Reserve funds rate to 6.5%) once asset price levels became a real concern. That period and the current environment are far from exactly alike, but there has to be a warning against complacency.
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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