Market review
In the second quarter the North American market continued to be dominated by tech stocks and the ‘Magnificent 7’, which performed well over the period. The dominance of these stocks means that the benchmark is becoming increasingly concentrated, and market performance is heavily dependent on these individual stocks.
Expectations of interest rate cuts from the US Federal Reserve continued to moderate over the quarter. At the start of the year market expectations were for 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.
Treasury bond yields had already risen from their near-zero levels a few years ago to between 4% and 5% and remained relatively stable over the quarter, with the US Presidential election placing significant uncertainty on the longer-term fiscal and macro-economic outlook.
Fund activity
The fund produced a positive return for the quarter but underperformed the benchmark. Most of this was due to asset allocation, 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, where it has no holdings.
The fund maintained its overweight positions in consumer staples, financials, healthcare and materials. Within consumer staples, the overweight position 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 just two 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 hanging over 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.
Outlook
The US election is the most significant unknown factor on the horizon, and US Treasury rates are likely to remain relatively unchanged until the uncertainty is resolved.
As already noted, the expectation of interest rates cuts has declined over the year to date. This has brought the market more into line with our view that inflation is stickier than many had hoped or expected. However, while those expectations are closer to our own long-standing view, the market is, in our view, 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.
Due to the underlying assets held in the WS Canlife North American Fund, the price of the fund is classed as having above average to high volatility.
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
