Investment Line: Market Update - May 2017
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 currently focusing on, and our thoughts on the issues of the day.
Volatility has fallen to record lows and markets are almost serene, sitting at all-time highs. There is a slightly eerie feel in markets that is starting to unnerve investors as we move into what can be a weak seasonal period. Some of this is due to the fact that depressed volatility has often been seen before significant equity market falls, but the unease is not just due to this. The Trump trade euphoria has seemingly died out, markets are being led by a narrow range of stocks (particularly in the US) and the improvement in sentiment-based data is not feeding through to real economic data at the rate hoped for. Growth is still uninspiring, economic policy uncertainty is elevated and Chinese attempts to control the series of bubbles in financial assets in the country will eventually have an effect on global liquidity. Investors can be forgiven for thinking that the risks that they know are out there are simply not being reflected in markets. This might be easy to overlook if assets weren’t so expensive, but eight years of unconventional monetary policy have ensured that almost nothing looks cheap. We feel emboldened by the current backdrop and continue to advocate a cautious approach. Others might be comfortable taking on more risk in such ‘sedated’ markets – we are not and expect this stance to be vindicated soon.
Macron’s victory in the second round of the French Presidential election removed a major worry for financial markets and led to a sharp rally in global asset markets. Attention now turns to French Parliamentary elections in June, to see what the scope for meaningful economic reform in France might be, but the defeat of Le Pen coupled with positive election results for Merkel in Germany, has given Europe some much needed confidence. Flows into the region have been strong, though this would still appear to be a recovery in its early stages (at least potentially) as investors begin to return and rotate out of more expensive markets, particularly the US. The economic data is slowly starting to improve and prospects for corporate earnings look relatively attractive. We are not tempted yet however. The Italian election (to be held by May 2018 at the latest) was always the greater risk for markets and is likely to become a focus of investor concerns towards the end of this year (the Five Star movement leads in the polls and has promised a referendum on the euro). Though sentiment is improving, it is still fragile, and a correction in equity markets in general could still affect Europe disproportionately. The structural problems for the continent are very real and we are continuing to hold off. Though we removed direct exposure and didn’t enjoy the ‘upside’ from the Macron win, it is worth remembering that the assets we bought with the sold European exposure – India and Healthcare – have been even more rewarding this year.
UK - INFLATION
Domestic inflation numbers are out this week and are expected to show the cost of living rising at the fastest pace in three and a half years. Energy bill increases and a rise in air fares are expected to be the primary culprits for driving up the CPI to the 2.6% level – the highest since September 2013. Most experts now think the 3% level will be breached this year, though few think we will see a rate rise until the end of 2018 at the earliest. The fall in sterling post the Brexit vote has clearly been a contributory factor here, and the strengthening of the pound following the announcement of the General Election has eased inflation concerns for some. We still have little feel for how the Bank of England will respond if inflation materially takes off – just how constrained will Mark Carney and the MPC find themselves by the indebtedness of the UK consumer and the housing market in particular? Inflation has not occupied investors’ minds for several years, at least not in the way it once did, but this could change. Brexit is going to be a painful process and the impact on the domestic economy is a severe unknown on all fronts.
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.
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