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.
Considering the range of matters investors could be worried about, markets have been incredibly strong and the turnaround in sentiment has been striking. Some of this has been caused by the excitement surrounding AI and its potentially transformative effects but the likely benefits of this technological advance do seem some way away for most companies. Undoubtedly, some relief has been obtained by the Federal Reserve’s decision to pause its interest rate hiking cycle and some commentators now think we could be close to the end of the policy tightening altogether. We are probably getting nearer this point but can still expect a temporary resumption of rate rises given that core inflation is still looking stubborn. This is even more true in the UK. Policy makers appear to be in a very tough spot with persistent inflation and wage growth. More rate rises are on the cards, gilt yields have moved beyond where they were at the time of the Truss/Kwarteng Budget crisis of September last year and the housing market is facing severe difficulties as mortgages are impacted.
In the US, the optimists are claiming that the rally – which has been led by the largest seven stocks and the AI narrative – is now broadening out to take in other sectors of the market, but it is already looking pretty tired. Positive sentiment is elevated, and this is usually a time for exercising caution, just as extreme negativity can signal that the low is near in a market. It is possible to construct a case for further advances from here based on momentum, the unwinding of short positions and other factors but there are still strong arguments against such a position. We still have the inverted yield curves, which are historically a strong recession indicator, rate rises announced to date have lagged effects yet to be felt, manufacturing data is weak, valuations look full (at least in the US) and earnings are likely to show further weakness. Strong rallies like this are common in market cycles and with a recession likely to have been merely delayed rather than avoided; we remain cautiously positioned for now.
Until the recent US equity rally, all the excitement had been around bonds and the fact that yields had now reached attractive levels. We had subscribed to this view too, reluctant to add equity but comfortable in increasing our exposure to high-quality fixed income, namely Treasuries and investment grade credit. Now we sense an opportunity to broaden out our fixed income exposure. As mentioned above, gilt yields have now reached over 5% for shorter-dated bonds and the ability to lock in these returns is tempting some investors. We are continuing to hold off for now as we believe an even more attractive entry point may be near. However, we are initiating positions in emerging market debt. The income story here is very strong and many emerging market countries were much earlier than developed markets to raise rates, meaning they now have scope for reductions as inflation comes more under control. Brazil, for example, would seem to have significant leeway, with rates over 13% and inflation just over 4%. With the choice of local currency or dollar debt and the ability to access corporate bonds as well as sovereign, this is an asset class we now feel can be added to some client portfolios to enhance returns.
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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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