GLOBAL MARKETS
You never really know where the weaknesses are going to show up in the global financial system, particularly at turning points in policy. The current issue vexing investors is Turkey, where the currency is collapsing as the economy deteriorates at a rapid pace. We already knew there were major issues around the amount of US dollar exposure and political risk, but the events unfolding can make one worry whether this constitutes a canary in the proverbial coal mine. As the Federal Reserve raises rates, countries that have borrowed excessively in dollars find themselves unable to repay their debts, the worry of default becoming real. It’s not just the Turkish state that is exposed, either – European banks that have Turkish operations have also been under pressure, with the main European banks index falling as a result – however, even in a worst-case scenario, the figures involved for the European banks are quite small. Perhaps this will stop at Turkey, but other emerging markets have been caught up in the very definite risk-off sentiment, which is infecting the asset class. For now it feels contained, and a lot of the falls in markets are due to weakening sentiment rather than weakening fundamentals. Of course, widespread sell-offs in asset classes can throw up interesting opportunities, particularly when the underlying components of the asset class are not homogeneous in nature and the widespread nature of the sell-off is based on fear rather than fundamentals. We remain alert at this “interesting” time!
US TREASURY MARKET
The events detailed above coupled with the threat to the global economy from an escalation in tariffs have inevitably led to a flight away from risk assets. The US bond market falls into this category and the latest moves there are a continuation of what we have seen over the course of this year. As we have written about before, the gap between the 2 year and 10 year Treasury yield has been narrowing and is now standing at a decade low. We are now down to a gap of 0.24% (the 10 year bond yields 0.24% more than the 2 year bond) and the gap has always turned negative before every recession of the last 50 years (i.e. the 2 year bond yields more than the 10 year bond). This doesn’t mean we are definitely close to a US recession and the general risk-off sentiment is clearly impacting here. It cannot be totally dismissed out of hand either though, and despite the impressive economic growth data from the US in the second quarter, a downturn is possible next year. We think there is select value in the US Treasury market and while we have initiated positions in some portfolios, we will remain vigilant to developments in the space.
THEMATIC INVESTING
The trials and tribulations of global markets make a disciplined long-term approach more important than ever. All equities are going to be impacted by a return of risk-off sentiment, but portfolios positioned to take advantage of long-term trends are much better positioned than those that are not. Technology and healthcare are well established in our portfolios and we continue to look for opportunities that tap into demographics and the inevitable disruption caused by global change. Geographical allocations will always remain relevant, yet their historical dominance of asset allocation is an approach that may need modifying.
Investment Line is written and edited by members of the Mattioli Woods Asset Allocation Team, 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 fall as well as rise, and investors may not get back the full amount invested. Past performance is not a guide to the future.
Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.
