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 shares our thoughts on the issues of the day.
Just where does one go in these markets? Equities have gathered themselves after a couple of weak months but still look vulnerable. Higher bond yields make fixed interest potentially more attractive, but this could represent a trap for the unsuspecting investor. Gold has done reasonably well but not in sterling terms, and so many supposedly more defensive asset classes have turned out to be meaningfully correlated to risk assets in general. It does not get much harder for an asset allocator than it is at the moment – valuations are rich across the board and the number of challenges facing investors can seem overwhelming. The mantra of diversification is all very well – achieving it is increasingly difficult. A move to being even more defensive feels risky in itself, though it is certainly possible to envisage a time when this will be the correct thing to do – for example, just how far off a US recession can we really be and when will markets start to price this in? We continue to be on full alert for a (further?) deterioration in market sentiment and will not hesitate to make further risk-reducing changes should these be warranted.
Our concerns over the UK economy have already led us to make reductions in UK equity allocations, but there remains the issue of how we approach UK commercial property. The characteristics of the asset class mean that it is still inherently attractive and the yields on offer from many vehicles mean that high allocations can still be justified. The yield may well be the only constituent of return for investors, though, as capital gains seem less likely/less readily available. Combining this apparent reality with the fact that we think recent optimism over the UK (at least expressed through sterling) is overdone, we feel the time is right to make modest reductions here.
One should be wary of simple explanations and the tendency to attribute meaning to ‘round numbers’ in data. This said, there is something in market psychology and crowd behaviour, and the recent move through 3% in the US 10-year Treasury bond for the first time since 2014 feels significant. Supposedly risk-free government paper is now providing a more compelling proposition over stocks, bearing in mind the average dividend yield for S&P 500 stocks is 2%. These higher borrowing costs reflect a robust US economy for some, but others (such as ourselves) will focus on the effect of higher rates filtering through the global economic system. What will the implications be for share buybacks that have sustained the stock market for some time? A figure of 3% may not prove to be the magic number that some commentators have claimed it would be, but it is another step towards ‘normalisation’, not only in terms of headline interest rates but also perhaps equity valuations. If risk assets have been driven by lax monetary policy, we are betting that a tougher regime will have implications in the opposite direction – we may yet be buyers of the ultimate risk-free asset, as it moves away from ‘return free’.
Recent volatility and the current products within the MW Structured Products Fund make this an extremely attractive time to buy. Unless we see very significant falls in equity markets, which would be consistent with a fully-fledged financial market crisis (not our base case), attractive returns appear likely over the medium term, and this is an opportune time to increase our exposure. Given our views on the challenges that lie ahead for global markets, this seems a likely source of strong risk-adjusted returns.
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.
