Market review
The UK equity market experienced mixed performance during the first quarter. A weak January was followed by relatively flat performance in February. In March there was a burst of positivity, resulting in overall positive momentum for the quarter.
This positive return was led by the industrials, financials and healthcare sectors. Within these, Rolls Royce maintained its momentum, Barclays pleased the market with a significant share buy-back and credible plan for growth, and GSK continued to produce positive updates about its product pipeline.
Meanwhile, materials and consumer discretionary underperformed. Within materials, miners faced challenging investor sentiment due to slowing global growth and the possibility of a ‘hard landing’ in the US. Within consumer discretionary, housebuilders lagged as expectations of substantial interest rate cuts became less prevalent during the quarter.
During the quarter, UK inflation maintained its downward trajectory, with February data showing a drop in CPI to 3.4%. However, inflation data points for December and January were higher than expected, causing bond yields to increase. Notably, two-year swap rates increased by 60bps between December and February, before trending downwards by 20bps by March's close, contributing to improved sentiment. This data broadly aligned with our expectations for the quarter, though the path was slightly more volatile than anticipated.
Fund activity
The fund produced a positive return and modestly outperformed the benchmark over the quarter. Noteworthy contributors to relative outperformance were the fund's overweight positions in financials and materials. At the stock level, the largest contributors to relative performance were our overweight positions in Barclays, Just Group and BAE Systems.
Within the industrials sector, we did not hold Rolls Royce, one of the best performers in the benchmark index, but our holding in Melrose, which we believe to hold a similar level of industry exposure but for less risk, did make a positive contribution.
While the fund maintained its core positioning, adjustments were made to optimise portfolio composition. We added exposure to Segro, British Land and Land Securities, and continued to gently add GSK in response to continued positive data. Though GSK faces a potentially costly legal battle, we believe this was discounted in the price. We swapped part of our holding in Reckitt Benckiser to Unilever as the two companies' risk-reward ratios diverged, and reduced our underweight position in Relx Group as it continues to produce solid results.
Outlook
Our market view remains broadly unchanged, with a cautiously optimistic outlook underpinned by our expectation that the UK economy will avoid any meaningful recession. Despite recent inflationary pressures, unemployment remains low and wage growth remains robust, which we expect will bolster consumer confidence in the coming months.
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 – however, how aggressively the Bank of England (BoE) will cut rates remains uncertain. Inflation has reduced rapidly but, with wage growth remaining robust, we question how quickly and sustainably CPI can stabilise at the BoE’s 2% target. We will be watching the data to inform our view.
Given our expectations that the UK will achieve a soft landing, we will look to capitalise on opportunities in lowly valued companies that are performing robustly in an improving environment. Geopolitics and elections in the US and UK clearly pose potential risks to this environment and so we remain vigilant.
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 19/04/24
