Market review
In the third quarter, the UK equity market was strong over July and August following the general election, but gave back some returns in September. Delivering some good news to mortgage holders and the housing market, the Bank of England delivered its widely expected 0.25% cut to the base rate at the beginning of August. Towards the end of the quarter, the US Federal Reserve also cut interest rates, by a slightly more aggressive 0.5%.
The consumer staples sector led the market over the period, in part thanks to Unilever, where a new management team delivered some strong early results. The consumer discretionary and financial sectors, where the banks unveiled strong second quarter results, also made meaningful positive contributions to market returns.
By far the largest negative contributor to market returns was the energy sector, primarily driven by losses by the two largest market players, BP and Shell. Worries about slowing oil demand in China and fears about an aggressive economic slowdown in the US, coupled with rumours of increases in production from OPEC+ drove the price of (Brent) oil from US$86 per barrel at the end of June down to US$71 by the end of September. Healthcare was also a significant detractor from the market return. Astra Zeneca, the largest member of the benchmark, produced some disappointing trial results from its oncology pipeline and market swiftly (and in our view somewhat rashly) moved to write off any prospects of success.
Fund activity
During the quarter the fund delivered a positive performance but underperformed its benchmark, with a strong July and August being offset by a weaker September.
The financial sector was the largest positive contributor to relative performance. Within the insurance sector, our holding in Just Group and a new position in Prudential notably added value. Utilities also contributed strongly to relative performance, led by Drax, which continued to generate healthy cash flows.
Industrials was the sector detracting the most from relative performance. The main detractor was Rentokil, which disappointed the market with the news that its acquisition of a US competitor was not progressing as well as hoped, falling more than 20% during the quarter. BAE Systems was also weak over the quarter despite posting solid results. Our overweight position in energy also hurt returns for the reasons described above.
There were no major changes to the fund but we increased our exposure to property and construction with the addition of Ibstock, the UK’s largest brick maker, which we believe is well-positioned for a recovery in activity across the industry. We also added developer and student property provider Unite.
As mentioned above, we also opened a new position in Asia and Africa-focused insurer Prudential. Prudential has undergone a long period of underperformance but recent management changes and positive actions from the Chinese authorities have improved conditions for participating in the structurally growing markets it operates in.
In terms of disposals, we exited our small position in housebuilder Crest Nicholson. It was subject to a bid from Bellway and we thought the positive share price reaction offered a good exit opportunity. We also sold out of Pets at Home, as it continues to be investigated by the competition regulator, and Sage, after a period of outperformance.
Outlook
We remain of the view that the UK consumer is set to feel richer rather than poorer as the year progresses and that interest rates are likely to come down slightly more in the fourth quarter. There is certainly a possibility that inflation picks up gently in the next couple of months, driven by weakening year-on-year data and an increase in energy prices. Various potential public sector pay deals may also be inflationary over the medium term. The data from the housing market is improving, with swap rates lower than they were at the beginning of the quarter, and both housing volumes and house prices beginning to reinvigorate.
Although the upcoming Labour Budget has caused some market consternation, we believe that it will prove more benign than expected. The conflict in the Middle East remains a concern, but we believe that our positions in the oil and defence companies should help to protect the portfolio should it intensify.
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.
