Market review
Global equity markets in the second quarter continued to be dominated by US tech stocks and the ‘Magnificent 7’, which performed well over the period. Some markets in Asia improved, though volatility remains, in part driven by currencies. Europe, however, was mixed, with notable uncertainty in France following the announcement by President Macron of a snap election for the French assembly. With an election in the UK in early July as well as the looming US Presidential contest, geopolitical factors were significant across all major markets, albeit to varying degrees.
Expectations for inflation and interest rate cuts from central banks provided the macro-economic backdrop, with a particular focus on the US Federal Reserve. Expectations of US rate cuts continued to moderate over the quarter. At the start of the year, markets were pricing in rate cuts of 1.5 percentage points. That expectation has reduced to 0.43 percentage points, as inflation is expected to remain stickier than previously expected.
Fund activity
The fund produced a positive return but underperformed its benchmark, with asset allocation contributing the majority of the relative underperformance, which was driven by the fund’s underweight position in technology.
The underweight technology position reflects our cautious approach to risk management; we believe it is an appropriate measure to mitigate the risks involved in this extreme concentration. It does not reflect any significant doubt about the sector, which is profitable and cash generative. The fund also remains underweight in industrials and real estate.
The fund maintained its overweight positions in consumer staples, financials, healthcare and materials. Within consumer staples the overweight is overwhelmingly in retail, notably Walmart, Costco and Tesco, rather than in consumer products. This reflects our view that pricing power has moved from producers to retailers.
At the stock level there were few significant changes. We added Tesla to the portfolio, as a period of underperformance compared to other large cap stocks has left the stock looking more attractive. US-China trade relations and the tariffs now imposed on import of electric vehicles from China by both the US and Europe also strengthen Tesla’s market position. Meanwhile, the shareholder vote over Elon Musk’s controversial pay deal has also removed an uncertainty overhanging the company.
The fund exited its position in Starbucks. The coffee shop chain has reached the limits of significant expansion in developed markets and the fund’s previous holding had been based on expectations of expansion opportunities in China. However, China’s consumer economy has not bounced back from Covid with the same vigour as other markets and that growth potential has all but disappeared. Within the UK holdings, we also added to National Grid after taking part in the energy group’s £6 billion rights issue.
The fund has been overweight Japan and the UK and underweight the US and Europe. During the quarter, the overweight position in Japan was extended slightly. The underweight position in Europe was reduced due to strong performances by key stocks, notably Novo Nordisk and ASML and the addition of industrial group Schneider Electric. It is notable that European companies outperforming in the period were those with significant trade outside Europe itself.
Outlook
Geopolitics and elections will be key factors in the second half of 2024. The election of a Labour Government in July was entirely expected and puts UK politics on a relatively stable path. However, while French elections saw the right-wing Rassemblement National held at bay by a unified left, it has left France with a hung parliament, with all the attendant uncertainty and potential instability.
France’s turbulent politics echoes our broader view of the political situation in Europe and the continuing uncertainty around the stability of the European Union. However, given the overwhelming dominance of US markets in both the fund and its global benchmark, the US election remains the most significant unknown factor on the horizon.
As already noted, the expectation of interest rate cuts has declined over the year to date. This has brought the market more into line with our view that inflation is stickier than widely expected. Nonetheless, in our view the market is still slightly overestimating the depth of rate cuts in the second half of this year.
Important Information
The value of investments may fall as well as rise and investors may not get back the amount invested.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.
This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available in the literature section.
Promotion approved 22/07/24
