Investment Line: Market Update - July 2020
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.
GLOBAL EQUITIES - US AND CHINA
Those hoping for an increased spirit of cooperation between countries in a time of crisis have been sorely disappointed. Relations between the US and China appear to be deteriorating almost as quickly as the newsflow on US coronavirus numbers and this is becoming a concern for investors. The US has now moved to close the Chinese consulate in Houston which has immediately led to calls for retaliation in China. It is pretty clear that certain members of the Trump administration are of the view that China is to blame for the ongoing global health crisis – even if this is unfair it is a predictable position to be adopted in the run up to an election. UK relations with China are not much better and it does feel as if China is coming under increasing scrutiny in several areas of domestic and overseas affairs (Hong Kong, Taiwan, treatment of the Uighur minority). The country does represent an attractive long-term investment destination and is clearly opening up to foreign investors with her A shares occupying a greater share of global indices, but the short term newsflow here is undoubtedly negative. President Trump has used inflammatory language such as “plague” and now also has a legal right to impose sanctions – neither is a good sign.
We are maintaining our Chinese allocations but it would be foolish to not retain flexibility in light of what is unfolding. The greatest threat to financial markets from the breakdown in cordial relations is probably the potential collapse of the US-China trade deal – January’s tentative first steps may be reneged on, existing tariffs may be increased and we could even see some sort of currency/devaluation response from the Chinese. A lot is at stake here and it would seem as if very little of this risk has been priced into markets which have, for understandable reasons, been recently fixated on Covid-19. How the China tensions interact with the US election will be particularly important – neither Trump nor Biden want to be seen as sympathetic towards China, but the Presidential incumbent increasingly seems to have little to lose from adopting an aggressive tone. Another reason to tread carefully over the summer months.
Difficult times for the global economy; no visibility on the economic outlook and most countries are firmly in defensive mode. Still, at least in the UK we’re not trying to step out alone into this brave new world. If you ignore Brexit. After a period of relatively Brexit-free newsflow, the issue is very much creeping back on to the agenda and investors are likely to start to fret soon. Negotiations with the EU are not progressing particularly well and there are reports that the UK government expects to be trading with the EU on WTO terms at the end of the year. Worrying stuff indeed, whatever one’s political views. It looks like any trade deal with the US is not going to be ready until 2021 either, so we may find ourselves in a position of extreme uncertainty in six months’ time. We are really struggling to get enthusiastic about the UK – we seem to have the same problems here as elsewhere plus a few more for good measure. This means allocations are likely to remain low relative to peers for the time being and depending on the quality of alternative ideas, we could even reduce exposure further. UK equities are at their widest ever discount to global equities, for a reason. At some stage, that will make them a buy.
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. Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.