Market review
In the fourth quarter the UK equity market was volatile, with a strong return in November mitigating weak returns in October and December, leading to a broadly neutral result overall.
The financials sector offered the largest contribution to market return, with the banks – in particular HSBC – primarily responsible.
Industrials and energy were also positive contributors to return. Compass Group, which is the largest constituent of the industrials sector, contributed most of the return, as it produced a strong set of results against a backdrop of cautious expectations. Similarly, Shell, which is by far the largest UK energy company (and one of the top three largest UK companies) was largely behind the returns of the energy sector, as the company recovered from a very weak third quarter, and the oil price remained reasonably steady.
In contrast, the healthcare sector was the largest negative contributor to market returns as Astra Zeneca suffered some disappointing trial results and a fraud was uncovered in its Chinese business.
The big events during the period were the UK Budget and the US Presidential election. The Budget, which was characterised beforehand as growth-focussed, delivered a series of cost increases for domestic businesses that is likely to lead to higher prices being passed on to customers and perhaps cost cutting measures in the form of lower levels of employment. This may present a difficult balancing act for the Bank of England to manage through monetary policy.
Fund activity
During the quarter the fund underperformed its benchmark and delivered a negative return overall. At the positive end of the spectrum, our overweight position in financials was the largest relative contributor. This can largely be attributed to our overweight position in Just Group, which continued its journey towards what we consider to be an appropriate valuation, and Experian, which had a challenging quarter and is not owned in the fund.
Materials also assisted relative performance of the fund over Q4. Despite being overweight the sector, which itself underperformed the market, our positions in Smurfit Westrock and CRH lifted the fund relative to the market. Consumer staples also contributed positively, due to our overweight position in Imperial Brands, which had a strong quarter.
Our overweight position in consumer discretionary was our largest detractor from performance as the house builders struggled, and two stocks we don’t own (Burberry and Games Workshop) had a very strong quarter. Our underweight position in industrials also negatively impacted relative performance as some of the constituent stocks that we don’t own, such as IAG (owner of British Airways), had very strong returns.
Trading activity was quite subdued as we awaited and then absorbed the impact of the Budget and the US election. We took some profits in Unilever and used the proceeds to add to Reckitt Benckiser and Astra Zeneca, which still enjoys many avenues for growth and whose shares, in our view, overreacted to the above events. We also added to Melrose as it recovered from some weaker-than-expected results.
Outlook
The future appears less certain that it did at the beginning of Q4. On one hand, the UK consumer is still fairly robust following a period of improving discretionary income, with a healthy savings ratio of above 10% and unemployment reasonably low.
On the other hand, the UK Budget has been tough on UK domestic companies with costs pressure next year coming from the increased minimum wage, National Insurance contributions and small company business rates for retail, leisure and hospitality companies. This could easily have the twin effect of being inflationary and increasing unemployment, therefore limiting growth whilst putting upward pressure on interest rates. Additionally, US import tariffs, which seem likely under a Trump administration, may well have an effect on UK companies, either directly or indirectly.
There isn’t very much data yet to guide us, but gilt yields have increased in response to increased government borrowing and swap rates have followed suit, which will lead to increases in fixed-rate mortgage rates. We will maintain a balanced portfolio and carefully watch the data to inform our views and positioning.
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 UK Equity Income 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.
