Market review
The key event of the fourth quarter for sterling fixed income was Rachel Reeves’ first budget as Chancellor of the Exchequer, which signalled increased government borrowing and rising gilt yields. The other component of significance for the wider economy was the increase in employer National Insurance contributions.
In the wake of the Budget the Bank of England (BoE) felt able to continue its rate-cutting cycle with a further 0.25 percentage point cut in November. As we expected, this was the last cut of 2024 as inflation continued to prove stickier than many had expected. Consumer Price Inflation, which had fallen close to the target 2% in Q3, edged back up to 2.6% in Q4. However, in our view, at this level inflation in itself is not a cause for concern. More significant during Q4 was the disappointing GDP growth, which created a further headwind for government finances.
There were also concerns over economic growth in other developed markets, notably the US, where the impact of the economic policies of the incoming President Trump remains unclear. As a result, sovereign debt yields rose across leading developed markets including the UK, a trend that has continued into the New Year.
The uneven economic path has been in line with our expectations, and during the fourth quarter we continued our strategy of agile trading to take advantage of short-term fluctuations and pricing anomalies in fixed income markets. Our ability to act nimbly was helped by market liquidity in December, which was notably higher than usual for the holiday season.
Fund activity
During the fourth quarter we largely maintained our long-standing overweight position in overnight deposits. However, we trimmed that position in December to take advantage of the higher liquidity available in the market, notably by purchasing secondary commercial paper that was available at 10-15bps spreads over SONIA. Towards the very end of the year, we began once again to rebuild our overnight position.
Elsewhere in the market, we looked for value in 13-month bonds, where notable purchases included Banque Federative du Credit Mutuel yielding 5.11%. We also added floating rate notes in the sovereign, supranational and agency (SSA) and covered bond markets. Notable purchases included European Investment Bank bonds at a yield of 5.04% and Development Bank of Japan bought at a yield of at 5.20%. These holdings have improved the fund’s liquidity, diversification and yield.
Outlook
Lacklustre GDP growth and rising gilt yields will continue to put pressure on government finances and the start of 2025 has seen yields rising further. Higher minimum wages and the rise in employer National Insurance contributions announced in the Budget are likely to put pressure on the jobs market. There is even the possibility of a period of stagflation further along.
We expect the risk of a slowdown in economic growth and the jobs market will outweigh concerns over inflation and that the BoE will continue to cut rates in 2025. The first of those cuts in 2025 is all but certain to take place in February and over the year we expect three or even four cuts in total.
In anticipation of these moves, we expect to add duration to the fund to lock in some of the attractive yields available. We will also continue our agile approach of looking to capture pockets of exceptional value where they arise.
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.
The WS Canlife Sterling Liquidity Fund is a UCITS scheme and a standard variable net asset value (VNAV) money market fund (MMF). The MMF is not a guaranteed investment, nor does it receive external support to guarantee its liquidity. Unlike bank deposits, investment in MMFs can fluctuate and investors’ capital is at risk.
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.
