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.
Most market concerns of late have focused on the high valuations which form the backdrop to both equities and bonds. Of course, investors have also started to fret over inflationary forces and the transience, or otherwise, of the price increases which appear to be feeding through the global economy. These fears are ongoing and capable of causing sell-offs at some point but do not present what one might term a concrete catalyst for a major risk-off event, especially with central banks so reluctant to move on rates.
The possible collapse of Evergrande in China is of a different nature, however. The crisis is exposing the fragility of the real estate sector in the country (which analysts have known about for at least a decade) and investors are fretting about the contagion which may result. It is very easy for troubles in the property market to spread to Chinese banks and indeed this has already occurred, but indirect exposure to the sector means banking stocks in other countries will possibly be affected. It is another worrying sign of some significant issues present in China and the slowdown in the property sector will potentially have a fundamental effect on the commodities markets. True enough, miners have exhibited significant weakness and the narrative of a slowing China and a consequently slowing global economy has certainly been bolstered. Optimists will of course see this as being a deflationary event which will go some way to calming the inflationary fears which many have been contending with of late. In truth, it is likely that the Chinese authorities will manage to contain the crisis effectively, but it does feel as if something of a warning bell has been rung. Exposure to “emerging markets excluding China” is already a growing theme and some investors are predictably thinking about ways in which they can restructure or at least tweak some of their Asian exposure.
Investors also have to contend with the prospect of a stand-off in the US over the debt ceiling which seems to come around periodically and cause unwelcome volatility. Some sort of compromise is likely to be found but the unsettling “negotiations” have the potential to cause a fair amount of disruption in both bond and equity markets. Closer to home, fears continue to grow over the energy crisis which is engulfing the UK (and indeed other European countries) and a difficult winter is unlikely to do wonders for investor sentiment. September often proves to be a demanding month for risk assets and this one has been no different. Investor sentiment appears to have become more cautious, and it feels right to continue to run portfolios with one eye firmly on what could go wrong while maintaining exposure to the opportunities which present themselves.
We have written previously about the difficulty in achieving diversification in these markets. If equities were to experience a meaningful correction it would be difficult to offset this with a sufficiently large rally in bonds given the levels which yields have reached. This is a concern and partly motivated by this we are trimming our holdings in Treasuries for more cautious investors, where positions have been significant. Maintaining a measured fixed income allocation in a portfolio still matters though and diversification within the asset class is of elevated importance – our blend of sovereign, investment grade and high yield of varying duration offers a sensible structure.
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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