Investment Line: our current thinking on markets - July 2023

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.

20 July 2023
4 Minutes
Global Markets

After the euphoric ascent of the AI-related mega-cap stocks in the US, the equity markets remain in optimistic mood. This is not least due to the signs of some progress being made on inflation in the US. The headline annual rate fell to 3% in June (the lowest since March 2021 and slightly better than expectations) though the decline in the core rate (excluding energy and food) was more modest, falling from 5.3% to 4.8%. So, still work for the Federal Reserve to do though certainly a step in the right direction. Whether it is their monetary policy which has made the difference is debatable, but we do expect more hikes this year and believe that hopes for cuts in 2023 will be disappointed. One of the problems for the policy makers has been the strength of the US labour market – recent data and revisions suggest the market might be softening but it has been exceptionally strong. The unemployment rate is only running at 3.6% and wage growth has maintained its momentum. Of course, the Bank of England would love to find itself dealing with inflation data like this – it seems that more tightening will be needed here with the recent public sector pay deals likely to add to wage growth and labour market problems. CPI is starting to fall but we really do look to be in an unenviable position, and this is being reflected in the continued discount of UK assets relative to peers. More pain ahead seems likely with mortgage holders currently at the sharp end of the fall out. 

A lot of the renewed interest in equities does seem rather odd – clearly it is based on the idea that we can get a soft landing, with inflation becoming a non-issue and recession being avoided at the same time, but this seems unrealistic to us. Remember too that the earnings yield on US equities is now giving zero premium to holding risk free assets, so they really do not look that attractive. Meanwhile, any downturn and reversal of policy will probably only stoke inflation again and this volatility of inflation as opposed to the higher absolute level will probably become a feature of markets. We expect more fallout from the policies adopted so far given the lagged effects of rate rises and a cautious approach is still advisable.

Time for gilts?

Though we are concerned that the market is getting too optimistic about the prospect of rate cuts if the backdrop deteriorates and/or inflation softens, we cannot deny the attractions of fixed income. Emerging market debt has recently been added to our existing exposures to investment grade credit and US Treasuries, and gilts are now making a reasonable case for inclusion. Many investors have moved to lock in 5% returns by buying ultrashort gilts – a strategy which would look pretty irresistible if it weren’t for the fact that we might be able to lock in even higher rates (recent CPI data aside)! Of course, you cannot time markets exactly but to lock in those returns you have to hold for the full period to redemption and this might mean funds being unavailable when other opportunities present themselves. We may make the move in coming months, most likely focusing on the shorter dated bonds though value may emerge at the longer end too. For now, we hold fire. It is difficult to overstate what a game-changer this is in the world of investment as we are now contending with a meaningful risk-free rate, though as suggested above, most equity markets appear to have not yet got the message.

Click here to read our thoughts on asset allocation. 

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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.

Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.

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