It may well have been short after the Bank Holiday, but last week didn’t lack things for investors to ponder. The biggest noises were, once again, political. Italy and Spain were the headliners – the former finally getting a government sorted out and the latter losing a prime minister. We’ll leave the political commentary to others – the investment implications are what matters to us.
In the case of Italy, the country has massive debt and the primary concerns are, therefore, about whether the new regime can maintain growth and that the debt worries do not become a full blown crisis. Spain is, in our view, much less of a worry. But, that said, it does seem to be indicative of an array of political challenges facing the European Union. We’ve flagged these before – and they are the reasons we are underweight European equities and don’t want any European bonds.
There are, of course, other challenges facing investors – but these seem to be settling down, at least for now. The price of oil seems to have stabilized. The trajectory of interest rates remains a big question – will it slow in the US as previous rises take effect, or will it be faster? Either way, it means investors need to think carefully about their positioning and the risks they are taking.
One of these risks is holding bonds. We are very wary of anything other than short duration and high quality. We accept that means the returns will be small. But in an area where we prioritise return of capital over return on capital, this is something we are comfortable with. As for equities, the short term outlook is unclear. Volatility has picked up, and a simmering nervousness about trade wars remains in the background. We do still, though, expect to see better returns from equities than bonds and are holing our positions as they are. We would, though, reiterate that our expectations for these returns are very modest.
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