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.
The current excitement around equity markets is to a degree understandable and is characterised by relief as much as anything after a brutal year of newsflow in 2020. But valuations are looking stretched now, certainly in the US, and the longer the run continues the more it starts to feel as if expectations are a little unrealistic. Though we will continue to play the US through our preferred thematic allocations, the US as an overall market does seem like a place where returns could be limited over the next few years. Composition wise, the main indices there are very tech- and growth-dominated and so a sustained switch to a more value style could impact disproportionately. A recovery in global fortunes is also likely to see a rotation into other cheaper geographical regions – with areas of emerging markets offering decent relative value (some may view Japan and even our own dear UK market similarly). We have persisted with our view that the US is (generally speaking) expensive and although the events of the last few years have not vindicated this (though our use of themes has been very successful), this does not feel like the time to get overly enthusiastic about the US market. The euphoria may be greatest there of course, and may yet push the market significantly higher, but when positioning portfolios for the medium term we believe there are better places to be. For now, we are a little more optimistic about prospects for risk assets than we have been over recent years, but we continue to employ our usual scepticism when faced with accounts of the equity markets that suggest the only way is up!
Equity markets have clearly become excited at the prospect of global growth accelerating on the back of Covid-19 vaccinations and economic stimulus, but bond markets have started to express their concerns over the impact on inflation. For now, rate rises seem a long way away – the Federal Reserve has, after all, suggested it will allow inflation to run ahead of where it normally would, given the economic backdrop. However, this has not prevented a meaningful increase in bond yields with the US 10-year reaching the heady heights of 1.3%. For now, this seems well contained and equity markets can even interpret this as a ‘positive’ given that it is driven by higher growth expectations, at least in part. Significant moves higher, however, and we may be facing a very different story. Firstly, much higher yields will have knock-on effects across markets and probably lead to higher funding costs for corporates that come at a time of elevated debt. Secondly, it changes the dynamic between bonds and equities. If higher bond yields are maintained, some of the relative appeal of equities (something that equity enthusiasts have made much of) will weaken. The impact of artificially low rates for over a decade means that no one really knows what the systemic manifestations of higher rates will be, so there will inevitably be a meaningful degree of nervousness – certainly if the US 10-year gets close to 2%. For now, it is fair to say that equity markets remain in the ascendancy, but if there is anything that will threaten this comprehensively it could well be the bond market. We are maintaining our Treasuries allocation for the time being but are aware that changes may have to be made as greater clarification is obtained over the path of the economy and inflation prospects.
Investment Line is written and edited by members of the Mattioli Woods Group investment committee 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 go down as well as up, and you may not get back the amount invested. Past performance is not a guide to future returns.
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