EUROPE
Europe is becoming increasingly popular with investors who very much see it playing catchup with the US. Normally this consensus positioning is off-putting to us but when we think a story is genuinely compelling, we will look to get involved. We have been building European positions in portfolios over the recent months and have continued to do so in August. They are now somewhat more typical in terms of exposure when compared with peers. Of course, we have always had European exposure through our preferred themes, but the more direct route of geographically focused funds now seems appropriate too. Sentiment amongst investors is much improved and both foreign and domestic flows have picked up significantly. Earnings upgrades have been impressive and on a granular level the European markets are naturally well exposed to a robust global recovery. Recent European Central Bank statements suggest a likely softening in the approach to inflation with it appearing that a higher degree of tolerance to price rises will be shown before rates rise. It also seems unlikely that any rate rises which do occur would keep pace with those of the Federal Reserve which should keep the euro at levels advantageous to the region’s exporters. The overall feeling is that it is Europe’s turn next. China staged an economic recovery first, then the US and the UK, and now Europe will follow. We are far from complacent of course but continue the direction of travel and adding in some portfolios.
FIXED INCOME
Fixed income continues to feature in asset allocation discussions. It is natural to be concerned at exposure to rate risk at a time when inflationary forces seem to be more tangible and after an exceptional run, our Treasuries position has been subject to scrutiny by our committee members. Allocations are relatively high lower down the risk spectrum and if yields reverse their downward trajectory and return to levels seen earlier in the year notable capital losses could occur. Treasuries have been especially helpful over the last few months and contributed positively to our performance, but it is right to sense-check positions. Our options would be to reduce fixed interest exposure overall by trimming the allocation, moving to inflation linked Treasuries in whole or in part, or perhaps looking at shorter duration options within Treasuries or in the corporate bond arena. All these options have advantages and disadvantages and represent distinct tactical moves. The inflation narrative still seems less than wholly convincing, real yields on short duration debt are at multi-decade lows and there is the question of where to redirect fixed income funds with asset markets also elevated elsewhere. Then again, one needs sufficient duration in the Treasuries holding to allow for meaningful diversification to be achieved (in other words, if equity markets fall and rate expectations come back, you need a decent compensatory response from the bonds as an offset). For now, we are retaining our Treasuries exposure and retain the flexibility to lower duration if we think it appropriate.
CHINA
Uncertainties over China persist and some of the recent economic data has been less than impressive. We already knew the economy would exhibit some weakness in the second half of the year and retail sales, investment spending and industrial activity are coming in short of expectations. Remember that the Chinese approach to Covid-19 is very much along zero-tolerance lines, so the consequences of any outbreaks are very much greater than they are elsewhere where more liberal measures are adopted. We are not making further reductions in exposure though we will continue to monitor developments in terms of both economic data and the interventions of the authorities.
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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