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.
Having implemented some de-risking in the portfolios over recent months, we are positioned sensibly for the significant uncertainty that we believe lies ahead. In reality, none of the major challenges facing markets have been resolved. It is still difficult to believe that any progress has been made on the inflation front though investors are starting to show some wishful thinking that the Federal Reserve might pivot on policy tightening sooner than expected. There may be some chance of this happening but with 9% inflation prints this does not seem very sensible as a policy approach. Indeed this inability of rates to keep pace with inflation, which may get entrenched if significant wage rises become the norm, is what gives hope to some of the asset classes which have arguably been disappointing considering the backdrop. This would probably include gold but would certainly include inflation linked gilts which have endured a torrid time as rates have risen quickly. Though it may seem strange, these assets may benefit from a resurgence of deflationary concerns as this would mean a swift change of direction in monetary policy and this ‘about turn’ is what may also drive equities higher after their fall from grace - though not if the policy pivot comes at the cost of a recession. The outlook is so uncertain and even if inflation itself does fall materially, ongoing inflation volatility seems very likely. Central banks maybe have not responded quickly enough, and we will now have to face the consequences. This is a very important earnings season in the US and elsewhere, and investors will be conscious that earnings expectations are high and companies will have to deliver. We have already seen some evidence of weakness from consumer facing businesses and announcements from Apple and some of the banks suggest that lay-offs are coming. Such a trend would obviously threaten the strong employment outlook and add to the recession case, but for the optimists it will be seen as bringing closer the moment where the Federal Reserve has to relent.
There are truly no easy answers at this time - vigilance and agility are likely to prove more important than ever.
For investors in the UK, it is probably fair to say that most of the recent entertainment since Wimbledon has been provided by the Conservative leadership election. This will provide some drama for the next couple of months and although the choice seems underwhelming it provides a bit of drama. We are now down to the final two after a painful process of several rounds of voting among Conservative MPs and the ultimate decision of who will be next Prime Minister will be decided by the Conservative party membership. In truth, it is probably not going to make a huge amount of difference who wins. No one wants to be seen to raise taxes but no one wants to be seen as irresponsible either. Whatever the ultimate outcome, the UK will face the same challenges of stubbornly high inflation, an economic slowdown, significant debt, and a long-term productivity issue. Hardly the backdrop that an incoming Prime Minister wants but “them’s the breaks”. The UK has hardly been flocked to by overseas investors and sterling has taken a hit from Brexit uncertainties and economic challenges, so whether this new political volatility adds further to the negative tone is unclear. Our large cap index has been a relatively safe haven in the global sell off due to the multinational presence there and the weaker pound, but smaller names have not been so fortunate. Opportunities will come along to add exposure to the UK but it will take more than a change of leader to bring this about and we are holding fire for now.
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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