Today UK Parliament will discuss and vote on the alternatives to Brexit. This will no doubt bring volatility into the markets and have investors waiting on the side lines for more information. Bigger picture the talks of a global slowdown are increasing (the bond market is starting to take notice) which isn't being fully reflected in the stock market as of now. Equities did have a series of declines as markets started to factor in the dovish Fed comments as being pre-emptive over accommodative. The fixed income market might be telling us that more trouble is on the horizon. The US treasury curve has inverted seeing the 6mo and shorter yields higher than the longer dated yields, out to the 10yr. This inversion makes many investors nervous about the future economic prospects because so many are willing to get less return for longer protection of their money. As we have seen in the past an inversion denotes fear, fear brings an increase in savings and less investment, and less investment brings a slowdown. The issue is more in the timing of these events and the severity. For investors this is a good time to get your cash ready to deploy as the fear of the slowdown starts to become self fulfilling. In deploying cash, this means paring back on some investments that have had good rallies in the past few months and possibly not rolling over longer term bonds that you may have maturing. I wouldn't recommend a total liquidation in your portfolio (probably ever) as over the long term staying invested is the best way to capture long term returns. This is more a move to re-allocate over the coming months or year. In Europe there are larger factors at work. The Fear of Brexit is at the center of everyone's mind and looking longer term, the outlook doesn't get much better. The data coming out of the Euro area is pointing to a steady decline in economic activity. This is bringing up some of the fears that have plagued the region during the crisis in 2011/12. s you ca see with German bunds (the safe haven of the Eurozone) investors are willing to pay a small price to protect their money, for up to 10 years. The ECB has been a contributor to this trend by pledging to keep rates the same until at least the end of 2020 and to continue to buy assets under their purchase program (of which there aren't enough German bunds to buy at reasonable prices). The sectors that are hit by these declining economic conditions in the EU are banks and industrials. Longer term I want to buy into these sectors, but cooler heads must prevail. Industrials can offer some decent yields, and would be easier to buy and hold through a rough patch. The banking sector will need to strengthen its capital structures and eliminate the fears of sovereign debt risks before they start to look attractive. Moving higher up the capital structure might be a better option in the near term, looking for preferred shares or bonds of financials companies. The key here is patience, as in the US market, it is good to have cash on hand and wait for opportunities to buy into good companies being sold off as liquidity becomes more valuable.
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June 2020
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