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.
Since we last communicated with you, markets have continued to deteriorate with some investors either capitulating or at least approaching that point. The speed of the sell-off in equities has staggered even seasoned observers. Diversifying (and hitherto helpful) assets such as sovereign bonds and gold have come under pressure as investors scramble to raise cash where they can. Fear is stalking the markets and memories of the financial crisis have re-entered peoples’ minds. The news flow surrounding the COVID-19 coronavirus has been relentless and as individual investors become personally affected by it, the atmosphere in financial markets has darkened. We are seeing the shutdown of large parts of the Western economy and schools and workplaces are effectively closed in many countries. The hit to economies is likely to be significant and the worst thing for markets is that there is no visibility as to when things will improve. There are so many questions about the virus and (even now) its impact, and it is impossible to know the answers - so the financial markets, admittedly in very dramatic fashion, have gone about the business of discounting a recession (which seems inevitable) and suspecting that it might be a rather deep one.
So why haven’t we run for the hills? Well firstly, the support from central banks and governments has been immense, and in short order. Not only have interest rates been cut and new forms of quantitative easing been launched in the US and Europe, but the Federal Reserve has announced huge liquidity support to avoid a dollar shortage in world markets. At home, we have seen very significant support announced for businesses and there is now a belief that further fiscal assistance will come from governments. Markets are certainly expecting even more to be done to help investors as even these multi-trillion-dollar efforts have not impressed them so far, and this has prevented a sustained rally in asset prices, though we have seen some positive days. The authorities know we are facing a real crisis and we can expect them to throw everything at the problem. If belief in their omnipotence does disappear then it is true that this crisis could deepen further, but they are not “out” of ammunition yet and there is reason to think that we can see some stabilisation around this point.
What we are doing, apart from reviewing our decisions on an almost daily basis (not the norm), is acting on some of the areas where we have concerns (and have been watching for some time) around liquidity and other vulnerabilities. A global recession, however short lived, is on the cards and even with government intervention, areas of the corporate bond market in the US face severe challenges. Downgrades are inevitable and the lack of liquidity in certain areas of the market raise the prospect that withdrawals could lead to funds being closed. This has been a long-term issue in the space and the sort of environment we are currently in has the potential to bring some of these issues to the fore.
Portfolios remain highly diversified with a heightened recognition of the importance of preserving capital as well as seeking gains. To ignore either one would be wrong. The changes we have made are relatively modest as we do not want to lock in the falls in equity prices we have seen to date. If we do consider any further action to be necessary, we will not hesitate to act. We will ensure we maintain communication as matters develop.
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.
Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.