Market review
UK equity markets enjoyed a strong April and May, but gave back some returns in June as investors digested the surprise announcement of a general election. The equally unexpected announcement of elections in France also contributed to investor caution, towards the end of June. The equity market’s positive return was led by the financial sector, most notably banking stocks, as well as healthcare and energy.
During the quarter there were also growing signs of stabilisation and recovery in the UK economy, in line with our expectations that the UK would not suffer a protracted period of economic difficulty. Consumer Price Index (CPI) inflation dropped back to the Bank of England’s (BoE) target rate of 2.0% in June. However, the underlying inflation picture remains more nuanced. While goods deflated, services inflation has proved more stubborn, due largely to strong wage growth with earnings also rising.
The underlying inflation data is likely to lead the BoE to take a cautious approach to future rate cuts and as a result gilts yields and swap rates – the key factor in residential mortgage rates – remained stable over the period.
Fund activity
The fund produced a positive return for the quarter and outperformed the benchmark. In sector terms, consumer discretionary, where the fund is overweight, was the largest contributor to relative performance followed by consumer staples, where the fund is slightly underweight the market.
At the stock level the largest contribution to performance came from takeover activity. The overweight position in mining group Anglo American benefitted from a takeover bid from rival BHP. While the bid was not successful, it highlighted the value of key Anglo American assets, most significantly its copper mining operations. Similarly, housebuilder Crest Nicholson was a leading contributor to performance after it received a bid, which has thus far been rejected, from Bellway.
The fund’s overweight position in Barclays was another significant contributor as the bank continued its recent rise from, in our view, an unreasonably low valuation.
Utilities were the largest drag on performance due in large part to a deeply discounted rights issue by National Grid diluting its share price. Financials were the other main detractor from performance, again largely due to a single stock, Burford Capital. The firm reported a quiet quarter for its business, which caught the market slightly by surprise despite a strong cash performance. Burford was also the single largest detractor, followed by pharmaceutical group GSK, which fell after an adverse court ruling in its long-running Zantac court case.
There were no major changes to the positioning of the fund. We added Severn Trent to the portfolio, and participated in the National Grid rights issue to maintain our relative weighting. With heavy investment spending needed across utilities for repair and modernisation, it is likely the regulators’ imminent rulings on allowable returns will be supportive for utility groups.
We sold out of Supermarket Income REIT in favour of some of larger and more diversified stocks in the sector. We are also reducing Capita and aim to sell out completely early in Q3. Capita is facing increasing competition from AI and its lack of resources to invest in technology will make it harder for the company to pursue its already difficult turnaround.
Outlook
Although, as noted above, there are lingering inflation concerns in the UK economy, the outlook has improved since the first quarter with the return of headline CPI inflation to its target rate. Even the higher services and wage inflation have a positive dimension, indicating the cost-of-living crisis is receding, boding well for consumer activity in the months ahead. Interest rate cuts from the BoE may not arrive as early as had once been expected, but a cut is still likely later in the year.
The election of a Labour government has been entirely priced into the market and, in comparison with other markets such as France and the US, the UK may begin to look like a haven of political and fiscal stability, which could provide further downward pressure on gilt yields.
These in turn should be positive for business investment, consumer activity and mortgage rates – providing further support to the fund’s overweight positions in the consumer discretionary and financial sectors.
Overall, the outlook for the UK economy and equity market is coming into line, albeit modestly, with our long-standing expectations of increased stability and recovery. Our strategy in the weeks and months ahead will be to cautiously increase exposure to those sectors and individual stocks likely to benefit from these conditions.
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 22/07/24
