Market Review
As in previous recent quarters, the market was volatile. A weak October was followed by a stronger year-end. The positive return was led by the industrials, financials and consumer discretionary sectors. The notably underperforming sectors were energy, consumer staples and healthcare.
During the quarter, UK CPI inflation continued to fall, with UK CPI reducing from 6.7% in September to 3.9% at the end of November. While the timing of wage growth data typically lags CPI data, it appears that wage growth in real terms continues to strengthen. Additionally, two- and five-year swap rates, which banks use as the basis for fixed-rate mortgages, dropped by over 1% and this will feed through into mortgage pricing over time.
This data was in line with our expectations. However, we thought the UK market might have responded more positively towards the end of the year. This is because December is often a good month for the UK market, (the ‘Santa Rally’) and given that sentiment around UK equities would have been rising from a low base.
Fund Activity
Over the quarter the fund generated a positive return but underperformed its benchmark. The main detractors on a relative basis were the underweights to the technology and industrials sectors. However, this was offset to a degree by positive contributions from the fund’s overweight positions in the financials and consumer discretionary sectors. At the individual stock level, Just Group, Taylor Wimpey and Auto Trader were strong contributors, while Anglo American and Rolls Royce were the largest detractors.
We made no major changes to the positioning of the fund. However, we reduced our exposure to Shell and BP as the oil price came down, and added to the housebuilders in anticipation of a better operating environment in the months to come. For housebuilders, we have been monitoring two and five-year swap rates due to their impact on fixed-rate mortgages. These swap rates fell during the fourth quarter, which should translate to lower mortgage rates. Encouragingly, the housebuilders we speak to are seeing robust levels of interest from homebuyers.
During the quarter we sold out of Travis Perkins and St James’s Place. In both companies, management seemed to be increasingly beholden to outside events, so we saw a better case for the capital in our other holdings, among which proceeds from these disposals were equally distributed.
Outlook
Our view, that the risk of a recession in the UK is lower than is being widely reported, remains broadly unchanged. Despite robust wage growth, inflation is reducing rapidly, and we will be watching the data to form a view of where it is likely to settle and when. The consensus is that the next change in UK base rates will be downwards, and we agree that this appears to be the most plausible outcome.
We are not yet convinced the Bank of England (BoE) will cut rates in the next couple of months, as some appear to think. This is based on the continuation of our thinking for most of 2023, which was that the high level of inflation is being chased by wage growth. Inflation has come down quickly, but wage growth is still robust, and this raises questions about what the BoE will do next.
Elections in the UK and US add further complications to the economic outlook, so we will remain open-minded and data-focused. The UK election will likely be in the second half of the year, so there is some time for circumstances to change before this, but we are relatively sanguine about any potential upheaval, due to the apparent similarities between Labour and Conservative policies.
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.
Promotion approved 17/01/24
