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.
What a difference a few weeks make. Inflation concerns in the market are still very real, but it is fair to say that they have been eclipsed very recently by worries over global growth. It was getting difficult to reconcile falling bond yields with data prints which suggested inflation was a growing threat but suddenly it seems more logical. The spread of the Delta variant suggests that Covid-19 is far from under control and that a normalisation of societies and economies is still some way away. Even in heavily vaccinated countries, the spread is occurring at a worrying rate and although the link between infections and hospitalisations is still seemingly broken, complacency has long left the room. Bond markets are clearly worried, and the US 10 year has moved down to 1.2%. Equities have stumbled pretty much across the board but particularly those sectors most geared to a recovery – financials, energy – have struggled most. Growth has been in the ascendancy again with those tech stocks hit by a sell-off earlier in the year, again showing their worth in investor portfolios. There is a distinct “not again” feeling about all this and although we do not see the need for drastic action it is fair to say that this feels like a(nother) potential inflection point. Our sovereign bond holdings have protected us well over the last few weeks (we had been saying they still offered diversification) and exposure to gold and other protective strategies looks wise at this juncture. No one wants a return to the lowest points of 2020 and it still seems very unlikely anyway, but we will prepare the portfolios for all eventualities as the time comes.
What to make of China? So much potential and a growing part of the world equities index but something seems very wrong. It would appear the economy is slowing and the authorities have acknowledged this with various policy moves (for example the reserve rate requirement for the banking system). Perhaps due to paranoia over a faltering economy, we are seeing more examples of intervention from the Government (see the moves in the technology arena) and there is a feeling that shareholders are going to be taking more of a backseat. This is deeply off-putting for investors – without adequate protection of ownership rights and some semblance of the rule of law how can one participate in such a market? Then of course we have the increasing rhetoric around Covid-19 and its origins and fresh accusations of spying from the West. It is starting to feel as if there is rather a lot of risk involved in being exposed to China and if the political voices against the country gather in number and volume and investors decide to step away because they expect others to do so, the consequences could be unpalatable. Of course, it can be argued that these are teething problems in the transition to an “open” system and that the importance of China in the global economy means that engagement rather than non-participation is the better strategy. There is clearly some validity to this, but recent developments would seem to suggest that some adjustment should be made in exposure. We have significant allocations in portfolios, so are trimming positions this month.
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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