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.
It still feels too early to deploy our current cash into equities. We have said how patience is a virtue, especially in a bear market where there are so many false dawns to seduce investors. The pick up in global equity markets in recent weeks feels like it is another attempt to draw in the unaware, or just those growing tired of a cautious approach. The fundamental outlook for the global economy is unarguably challenged and 2023 is going to be the year where recession bites. Equity markets do not seem to be reflecting this reality yet and we think a fall to levels lower than indices saw earlier this year is more than possible. It is also the case that we have not yet seen the economic effects of the rate rises already announced as there is always a lag before higher borrowing costs filter through to impact corporates. On the basis that markets do not usually form a low for the cycle until we are a few months away from the low point in the economic data, it seems almost outlandish to suggest that we are close to a good point to tactically add risk.
If anything, it is the bond markets which are offering attractive returns at these levels – if rates do stop rising in the US and elsewhere, bonds will benefit (to a lesser degree admittedly than equities), and if this comes at the cost of recession, some fixed income will also attract a bid in a flight to safety. Indeed, we have recently discussed the increased attractions of the bond space and this month sees us take some small steps to add to credit risk. This is on the basis that we question whether rates can move higher than the levels currently being priced into markets without causing economic consequences, which would be unpalatable. All of a sudden, there is an alternative to equities and investors are going to have to adjust to what this really means for asset classes across the board. Still, we proceed with caution.
You can almost feel the impatience of investors as each piece of favourable news on inflation triggers an aggressive rally in asset prices, but the bigger story is still playing out. Inflation was undoubtedly the driving narrative of 2022 but there is the very real possibility that recession is going to displace this early next year. The time is going to come to add equities and for our discipline to be rewarded but we need to be closer to a bottoming in the economic data before we increase allocations.
The UK has at least partially restored its credibility with investors as seen by financial markets, but the Autumn Statement also served to highlight just what a dire state the economy is in. Although it makes sense for UK investors to have a degree of skew to domestic assets (to remove some currency risk) this has its limits and it really is difficult to make the case for owning UK assets at this time in any sort of overweight position size. Sure, there are problems everywhere at the moment and it is unfortunate that the UK has been such a high-profile basket case of late, but the issues are very real. We have had less exposure to the UK economy than have many peers over recent years, but we still debate whether even our levels remain too high. Undoubtedly assets are cheap here, but this is probably a fair reflection of prospects for the time being and the market has delivered its verdict. Poor growth and productivity rates, ongoing complications around Brexit and strained public finances are a potent cocktail to put overseas investors off. When we are more confident in the wider prospects for risk assets we will debate our positions further of course, and may even find some pockets of domestic value, but in that environment there will probably be other contenders to receive increased allocations.
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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