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 most important matters of the day.
We issued the previous version of Investment Line early on Friday morning, after the UK EU referendum came through 52/48 in favour of leaving. At the time we concluded by saying “Considerations for our investment team include the future for the EU; the potential for action from the Bank of England to ‘protect’ sterling; the equal possibility that inflation may rise as a result of increased base costs; other central bank action; lower GDP as the continuing (increased) uncertainty reduces business investment and consumer spending; the possibility of a political vacuum in the UK and Europe, and indeed the aforementioned issues in the US, China and beyond.”
Has the dust settled, or were concerns overplayed? Is this the calm before the (real) storm or have markets done the job of central banks, anticipating what they believe will happen when negotiations conclude many months or years into the future? Does a (hopefully temporary) vacuum in British politics now play better with markets than the certainty of before? Spain’s economy has performed well for the last six months despite not having a government (still no majority despite the latest election) so it does make you wonder about the role politics can play. The reality of the post-referendum UK has been much rhetoric, little action … though to date, apart from for sterling (not un-important, but perhaps a little less visible for most of the voting population), action has perhaps not been needed.
The now fairly well-established trend of ‘bad news is good news’ looks set to continue, at least in the very short term. When poor economic data (or in this case the threat) comes through, investors seem to turn to their imaginary friends, the central bank(s), and say, well, I assume you will throw some more free money our way? Interest rates will be assumed to stay lower for longer with the potential to go into negative territory, but as we have seen in Japan and Europe, negative interest rates could cause unintended consequences, such as a stronger currency. It also could result in the Federal Reserve being handed the excuse for further quantitative easing rather than a July rate hike?
However, not all bad news is looking like good news; hardest hit have been banks, especially European banks, and more widely European equities. Our assertion that Europe and the ‘project’ faced more questions than the UK in the event of a vote to leave do look to be coming through, and if there is currently some uncertainty, wait until the fear kicks in! While the FTSE 100 has risen to a higher level than it was prior to the vote, there have been large movements within the market, with domestically-focused stocks, such as banks and housebuilders, remaining 15% to 30% lower, with international and ‘defensive’ stocks moving 10% to 15% higher. With these kinds of large price swings, our tactical positioning a week after the night before looks right for now, and after further consideration we remain on the side of caution, convinced and agile, ready to move again. Adding to the threats we highlighted in summary last week, we now have more political uncertainty not less; a real threat to the union of the United Kingdom; ‘proof’ that the result has bothered many of our European neighbours; the potential for a European-led banking crisis … oh yes, and President Trump.
We are working hard to find a path through the increasingly tangled world that investors face, as popularism rises, income falls and uncertainty intensifies. We are on your side, and we have the tools. When we do decide to change allocations we will issue another edition of Investment Line, perhaps even before we change, as today.
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.
Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.