Market review
The second quarter of 2024 saw a sharp rise in government bond yields as expectations around future rate cuts continued to diminish. The main theme that played out across all markets, but particularly in the US, was the process of deflation taking far longer than previously anticipated. Services inflation, led by stubborn wages, fell less quickly than had been expected. There was also an increase in geopolitical tensions during the period. The conflict in the Middle East flared up further, with Iran’s participation having become at some point a real possibility, leading to an increase in oil prices.
In Europe, despite the European Central Bank delivering its first rate cut in June, expectations for subsequent future rate cuts during the year also reduced, which put fixed income markets under pressure. In the US, it was a particularly mixed quarter. We started with inflation prints above expectations in April but by June, inflation levels gave hope that the Federal Reserve may be able to deliver some cuts by the end of the year. Central bank action is likely to continue to be very data-dependent.
At the end of the quarter, attention turned to the forthcoming European elections. In France, President Macron called a snap parliamentary election that put the risk of fiscal slippage back on the table, which could delay or reduce the number of future rate cuts that central banks would deliver. In the US, the prospect of another Trump presidency also brought fiscal stimulus back into sight, which would slow down the deflationary process still further.
Risk assets generally had a solid quarter. Equity markets rose on the back of the gains in the technology space and there were opportunities in the artificial intelligence arena. Credit markets were also supported as investors continued to like the yields offered by corporate bonds. There was no perceived stress appearing in the investment grade space for credits and defaults remained low by historical standards.
Companies, overall, remain in good shape. Looking at corporates, there was outperformance in the financial sector, where companies had benefited from the rise in interest rates. The sector has shown resilience in weathering the bumps in the road in the US banking system last year. The quarter painted a good picture for credit, and for the financial sector in particular.
Fund activity
During the period, the fund produced a negative return that underperformed the benchmark. We participated in new issuances at an attractive level from New York Life, Norwegian airport group Avinor, healthcare services company Becton Dickinson and the British engineering group Eaton.
Outlook
The summer months are usually a favourable period for credit, due to the low levels of issuance. We are expecting that to be the case again in 2024. We also believe that credit spreads are reasonably close to fair value. We are still investing in the credit world, but are becoming more cautious in this space as interest rates start to nudge downwards.
We are expecting progress on the inflation front, which would enable central banks to start or continue cutting rates. However, there is always the possibility that inflation proves to be stickier than forecast by central banks. There is also the risk of a fiscal easing in Europe and the US in the later part of the year that could keep inflationary pressure at levels too high to justify further rate cuts. We continue to add credit exposure to the fund, especially in the financial space, although we are becoming more selective as valuations shift.
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 22/07/24
