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.
Last year saw markets in a positive mood over political risk, with the days of President Trump seen as a threat to risk assets seeming a distant memory. Suddenly, however, matters seem somewhat different. Firstly, his administration is embarking on a tax cut-induced stimulus at the top of the economic cycle, which is creating real concern about bond yields and the trajectory of US debt. The President is also returning to his election pledge on trade and imposing tariffs on steel and aluminium imports (25% and 10% respectively), pithily stating: “Trade wars are good and easy to win!” Asian and European markets were particularly affected by the latest development, and this has served as a reminder that unconventional policies – and the unpredictability of the timing of them – is still a real risk. President Trump may even make good on his threat to leave the North American Free Trade Agreement. With the trade news flow coming when the appetite for risk assets is already showing vulnerability, it’s hardly a time to be brave.
Those worrying about the likely fortunes for UK assets will not have been reassured by the latest developments on Brexit. Jeremy Corbyn has announced the UK should remain in a customs union after Brexit, putting the conservatives and Theresa May under tremendous pressure. Specifically, this puts remainers within the conservative party in a real quandary of whether to support the Government or to act in a way that would surely bring it down. The EU Brexit treaty appears to demand Northern Ireland remains in the customs union, which certainly puts it at odds with the cabinet's position. Relationships between the Government and the EU seem to be moving firmly downhill and for some there is a slow realisation it is the Europeans in control, and not us “liberated” Brits. Overall, it is all a bit of a mess, and the odds of the Government surviving are deteriorating. In these difficult times it could be seen as patriotic to support UK equities, but there is no room for sentiment here. As a responsible investor, we feel we should be extra cautious with UK exposure. Of course, if one sees a Corbyn administration as a “good thing”, that is a different matter.
Our preference for specialist equity allocations is further confirmed by the introduction of a technology allocation. Though valuations are stretched in some areas, the growth potential in this space is attractive on a long-term basis. We favour a broad approach, accessing diverse themes rather than focusing excessively on the large US FAANG stocks, or ideas in robotics and cyber security. A risk-off environment could cause challenges for the sector, so our approach to valuation remains long-term in nature.
Was it inconclusive? Of course it was. Does anyone care? We certainly do. Though the anti-Euro (though not anti-Europe) sentiment in Italy is arguably diminished, the inability of Italian politicians to deal with the country’s wayward finances could be a concern for investors. The casual dismissal of political risk was always something that had its natural home in an undiscriminating bull market; but now that sentiment has shifted, might we see investor sentiment more vulnerable to political factors? Time will tell, but the story of political populism has certainly not gone away and Europe remains acutely vulnerable to the social forces that have gathered pace since the financial crisis, something that has manifested itself most clearly in this election’s successes for both the Five Star Movement and the Northern League.
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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