GLOBAL MARKETS
The macro landscape is broadly unchanged over the course of the last month. However, those already fretting about inflation have probably found new reasons to become concerned in recent weeks. Expectations of cost increases in the US are rising and Chinese factory gate inflation points to issues ahead. The Federal Reserve keeps telling the market it thinks inflationary pressures will prove to be transitory in what is probably an attempt to quell market concern, but it looks as if the combination of Covid-19 related stimulus and supply side effects make the likelihood of some sustained inflation higher than it has been for a long time. This said, the debate rumbles on and is far from settled.
We seem to be edging towards the full unlocking of the global economy though the sort of delay we have seen in the UK does give reason to be cautious. The Delta variant may be the one exercising investors at the moment, but there will be other ones which could pose greater challenges. For now, risk assets are undeterred, and valuations reflect this. We need to keep an eye on the potential consequences of the investigation into the origins of the Covid-19 outbreak – it may not do a great deal for US-China relations and it has become clear already that the Biden administration is not going to enjoy much better relations with China than the preceding one did. There is still, we suspect, some mileage in the rotation from value to growth but as with most market shifts, things are rapidly priced in. Despite astronomical equity valuations generally, the US seems like a decent way of playing this and active management is certainly back. Other more value-oriented markets, not least the UK and Japan, are all served well by the recent changes in style preference. However, all depends on what happens to inflation and rate expectations and clarity here is very difficult to come by, so our positioning remains largely as it was.
ALTERNATIVES
We have referred in recent communications to the fact we have been reviewing our approach to Alternatives. We have a range of diverse, interesting options to choose from here but the subcategories we have used to date – cash plus, tactical hedge and uncorrelated – have perhaps not best expressed our thinking and the way we seek to add value to portfolios. We have therefore decided to split the category into those innovative and different ideas which do not fit elsewhere in terms of asset allocation but are more focused towards equity-like returns – and then “protection assets” which might provide enhanced cash returns or seek to hedge a risk in portfolios. This change has led to some modest changes in the distribution of assets within “Alternatives” and we have assessed all of our existing preferred investment list funds in light of the new classification. Fortunately, the team work on ideas constantly, so there is always something in the hopper. For more defensive and cautious portfolios it is natural that protection-type alternatives will feature more highly whereas for those with greater appetite for risk, the niche ideas generating equity type returns will take precedence. Though the diversity of fund options will be undiminished, we expect the change will bring a greater clarity and focus to the asset class and what we are trying to achieve in portfolios.
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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