Market review
We ended 2023 with market participants interpreting that a fall in CPI would lead to central banks aggressively cutting rates in 2024. As economies held up better than expected in the UK, US and eurozone, inflation stopped falling, in line with expectations. However, one important measure tracked by central banks is services inflation, and this measure proved to be stickier than expected in the first quarter. This resulted in bond markets repricing for a less dovish stance from central banks and hence, a lower number of rate cuts. The upshot of this was that government bond yields rose in the first quarter of 2024.
Due to the US economy holding up better than expected and the UK economy coming out of a very shallow recession, credit spreads tightened in anticipation of improving credit fundamentals for investment grade names. This helped corporate bonds to outperform government bonds.
In the first quarter, unemployment figures showed that labour markets are not as tight as they had been in both the UK and the US, although they gave no reason to suggest a major recessionary event was on the cards, even with the UK confirmed as having entered technical recession in the last quarter of 2023. Consumer spending has been holding up surprisingly well.
The risk we face as inflation numbers come down over next few months is that it settles at a higher level than central banks were expecting, which could lead to rates being higher for longer.
Fund activity
The fund produced a slightly negative return, modestly underperforming the benchmark. All currency exposures are unhedged in the fund and we were underweight Japanese yen and overweight in sterling. Overall we were short duration during the quarter, with short duration in US Treasuries and Japanese government bonds.
With markets concerned about recessionary risks in Europe and the US during the second half of 2023, we saw an opportunity to increase our exposure in financials in instances where we considered the bonds to be trading cheaply. Now, as markets have become more comfortable with the macro-outlook, banks, in particular, continue to look cheap vs corporates.
During the period we also took profit on Telefonica 3.875% corporate hybrid and some real estate investment trusts (LOGICR 1.625% 30 and PSA 0.875% 2032). We also bought the Norwegian state-owned electricity transmissions operator Stanet 3.375% 36 that came to the primary market.
Outlook
With services inflation being stickier than expected and wage growth at elevated levels in the US, UK and Europe, we aim to be nimble with the duration and credit positioning in the fund. Any signs of further stickiness in inflation will increase the volatility in rates and credit.
With economies holding up better than expected the path to 2-2.5% inflation target might be bumpier than expected. We expect volatility will bring in opportunities across different regions.
Important Information
The value of investments may fall as well as rise and investors may not get back the amount invested.
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 22/04/24
