Market Review
During the fourth quarter, many major equity markets – including those in the US – moved upwards. A significant driver behind these positive movements was the fall in bond yields over this period, which was particularly evident in US Treasuries. The yield on US 10-year Treasury bonds peaked around 5% in October but had fallen slightly by the end of the year.
Inflation also continued to fall in the fourth quarter. In November, the US Personal Consumption Expenditure index – a measure that receives a lot of attention from the US Federal Reserve (Fed) – rose at a rate that was below the level many analysts had expected and further fed into the narrative that the US central bank has finished raising interest rates. The decline in inflation was also helped by broad-based falls in commodity prices, with the price of oil per barrel falling from US$90 in October to just over US$70 by the end of the year.
Fund Activity
Although performing strongly in absolute terms, the fund underperformed its benchmark over the period. The main drag on relative performance was allocation to Asian ETFs. Stock selection within financials and materials produced modest relative gains.
It was a quiet quarter in terms of fund activity. We did, however, add three names to the portfolio: Align Technology, Exact Sciences and Intel. Align manufactures dental aligners, including Invisalign, and benefits from the competitive advantage of its technology working far better than others in the field. We have held Align before and rebought it because it may benefit from improving economic conditions, as the company sells at a high price point. The same argument can be made for Exact Sciences, which provides cancer diagnostics. We bought this stock as the competitive threat in the space has diminished and the company is positioned to benefit from greater spending in an improving economy.
Our purchase of Intel, by contrast, was mainly a play on the growth of the semiconductor sector. In addition, although the US firm has been losing market share over the last 10 years, with its share price suffering as a result, it could benefit from the US administration’s ambition to nearshore or onshore its semiconductor manufacturing, to ensure that its semiconductors, which are vital to defence as well as the economy, are manufactured closer to home. A recent change of company management could also drive further improvements.
There was one disposal during the quarter: Amedisys, a healthcare provider that is in the process of being acquired.
Outlook
Based on the events of the fourth quarter, many investors are optimistic about interest rates coming down in 2024. The market is pricing in the Fed cutting rates by around 150bps. We also expect rate cuts, but regard 150bps as excessive for one year. Additionally, investors should be mindful of the number of major elections scheduled for 2024 – most importantly in the US but also in the UK, India and Taiwan – which brings a high degree of policy risk from incoming governments. Geopolitical risk could be even more pronounced in 2024 than has been during this already volatile period.
Overall, our outlook is more nuanced than it was this time last year. Going into 2023, the narrative was that economies would enter a challenging recession as bond yields had already increased quite significantly and appeared set to continue rising. At the start of 2024, this perception has reversed and further declines in bond yields have been priced into markets.
From a geographic perspective we continue to like the US – it is where we see the most attractive companies and exciting innovations. Unfortunately, our bullish view of China’s growth prospects – after it dropped its controversial Zero Covid policy – turned out to be wrong. However, we will keep watching China as we expect there to be another round of policy action to tackle its problems. Elsewhere, we believe that India holds a lot of investment opportunities and that the country’s upcoming election make it one to watch.
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 11/01/24
