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 been relatively cautious in our positioning for several years now, though most of the risks have failed to materialise in full. If anything we are now even more vigilant than ever. The press has been full of articles relating to the 10th anniversary of the demise of Lehman Brothers, and although the time period is arbitrary and tells us nothing of substance in itself, it does provide a moment for reflection. Specifically, it serves as a reminder of how imbalances and debt accumulation in the financial system can lead to extreme stress and financial crisis. We look across the globe and are frankly staggered at the increase in debt levels since 2009, with excesses almost everywhere. The problems this time are not concentrated in the US housing market, but just a glance at corporate debt levels in the US alone are enough to make one concerned. Elevated debt might be bearable when things are going well, but at the end of a cycle with interest rates now rising and a US recession drawing closer (even though far from imminent), this issue surely has to come back on the radar. The truth is that central banks bailed out the financial system ten years ago and helped rescue the world from a depression. This was justifiable, but it has made investors complacent that they will always be rescued from bad decisions and also created resentment due to the effect it has had on inequality. As investment managers, we are now starting to look ahead to the likely effects of the Federal Reserve tightening financial conditions, with asset prices having been elevated by the cheap money provided over the last ten years. We are not making any changes this month, but questioning whether we are prepared for a meaningful correction is part of our current thinking. Don’t expect us to get more bullish in a hurry.
Brexit isn’t really going that well is it? The possibility of a no-deal or even just a poor deal means we remain cautious on the UK. Our allocation to domestic equities is very low, but commercial property continues to feature highly in portfolios. As we have discussed before, this is well diversified across sectors and geographies with some very niche holdings included. We still like the asset class (not least because of its strong yield appeal), but our concerns over the UK as a whole means that we have to ask whether there is some sort of inconsistency in our thinking here. For now, we are comfortable with exposure, but more defensive and cautious clients may not have the appetite to deal with the volatility of some property investment trusts in anticipation of a poor Brexit outcome. We continue to follow developments closely here and will continue to refine our positioning as appropriate.
The material falls in emerging markets and currencies are naturally leading some to consider increasing allocations. Compared to developed markets they look cheap on a relative basis. Adopting a long-term view, the growth stories they present certainly look interesting. Adventurous investors probably could stomach taking the plunge at these levels, but we think there will be better opportunities as the Federal Reserve continues to raise rates and relations between the US and China deteriorate.
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.