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.
China is stealing the headlines at the moment but absolutely not for the right reasons. The country is facing serious economic difficulties and the data is a steady flow of negative news. Retail sales and trade data have been exceptionally poor, deflationary forces are emanating from the economy and the property sector is in dire straits. We have seen some minor stimulatory measures such as modest rate cuts but there is no easy solution to the problems the country faces, and this could become a long-term structural issue. Of course, the malaise is probably helping with the inflationary fight in other countries given the downward pressure it is placing on commodity prices, but this does not feel like much consolation as China is not generating the growth needed to help keep other economies moving. Remember, it was China that effectively rescued a spluttering global economy back in 2008/09. Investors really have to be careful what they wish for here, as potentially systemic problems from China’s property market and weak demand in general, are clear threats to risk assets but if the economy recovers, we may find ourselves facing an uptick in inflation.
We have been less than convinced by the China equity story for some time. Aside from the economic difficulties we also struggle to get comfortable with the political risks involved. The ruling party has effectively banned reporting of data on youth unemployment and other matters which is yet another reminder of the complete lack of transparency around investing in the country. If you do not have this when investing, one’s options are really reduced.
Central bankers have been making meaningful progress with inflation, but this has not prevented longer dated bond yields from pushing further out. This might suggest that markets are starting to come round to the idea that inflation is going to be persistently above the 3% mark for some time and that yields have to move to compensate. Of course, we also have the massive increase in US debt to contend with and the supply-demand dynamic of Treasuries is putting pressure on yields too. Then we have the Japanese central bank responding to the emergence of inflation at home by saying it will relax its yield curve control policy to some degree. If Japanese bond yields really were to move meaningfully higher this would continue to drag other sovereign bond yields higher too. This again shows that although diversification can now be obtained from the Government bond space, there are still pressures here which could weigh on portfolios. Regarding the US, the Government debt level has always been brushed under the carpet (aside from a few debt ceiling related panics) but it now feels as if it might be approaching a level where it will really impact. Overseas investors may reduce demand for the bonds at the same time as supply jumps higher which makes us especially vigilant. For now though, we are comfortable with our holdings.
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Investment Line is written and edited by Chief Investment Officer Simon Gibson and Investment Strategist Richard Smith 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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