Market review
The third quarter marked a pivotal shift as the US Federal Reserve (Fed) delivered a 50bps rate cut, prompted by inflation nearing its 2% target and rising unemployment. Initial market concerns over recession faded as focus shifted to economic stability, resulting in equity markets rallying. This prompted a notable rotation away from what many view as overbought tech stocks, into small-cap and value stocks.
In fixed income, upgrades exceeded downgrades for the first time since early 2022, and speculative-grade default rates declined. Corporate bond issuance rose, reflecting strong demand, and total returns were positive across the US, Europe, and the UK, reinforcing the case for diversification between equities and bonds.
For UK investors, gains in global equities and unhedged fixed income were eroded over the quarter by the strengthening pound. Budget-related uncertainty reversed a little of this in late September.
In Asia, Chinese government policy support boosted returns for Chinese assets and global companies with significant exposure to the region. While geopolitical risks remain, further domestic policy support could signal a rebound for China's economy.
Fund activity
During the quarter the fund produced a positive return but underperformed its sector. The allocation to US technology dragged on returns as investors rotated away from the sector and sterling strengthened, while sterling appreciation also eroded gains from global unhedged bonds. The UK equity allocation also underperformed the benchmark. However, the allocation to our active European equity fund was positive for returns, while our holding of high yield bond funds continued to outperform over the quarter. Exposure to physical gold continued to prove a useful hedge, delivering a robust return during the period.
In terms of fund changes, we increased exposure to both hedged global bonds and high yield bonds. We also added to our active emerging markets allocation. With both political tensions and potential policy stimulus likely to increase, we believe that active management is better suited to the greater volatility that could arise from this. We reduced cash in favour of both equities and bonds as the market outlook improved, and also continued to reduce exposure to UK physical property.
Outlook
Interest rates remain a key focus for markets as we approach the final quarter. The Fed has signalled a slightly hawkish stance, to which markets responded positively. The BoE echoed similar views, impacting currency markets, with any further fall in sterling likely to boost non-sterling asset returns.
Markets are currently pricing in three US rate cuts for 2024, which we consider ambitious. We would not be surprised to see this expectation revised closer to the next Fed meeting. We believe the US market will maintain its bullish trend, with consensus leaning toward a soft or potentially no landing scenario for the economy.
In the UK, investors are preparing for a challenging budget, with uncertainty driving short-term volatility. We see better near-term opportunities abroad. Europe, particularly France and Germany, faces growth and political stability issues, leading us to focus on peripheral regions such as Spain and Portugal, as well as companies with global exposure.
China remains a potential market mover, especially if policy support continues. Beneficiaries could include emerging markets, Asia-Pacific, and global companies with high sales exposure in the region, such as luxury goods and beauty sectors.
Overall, we hold a cautiously optimistic outlook for US and Chinese markets, with mixed prospects for Europe. In fixed income, we favour a shift away from US treasuries towards gilts, with increasing allocations to non-hedged global bonds. Interest rates and currency movements will be critical, and diversifiers like gold offer protection against growing government deficits and geopolitical risks.
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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 Diversified Risk Managed Funds may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the fund. The value of the property is based on the opinion of a valuer and is therefore subjective.
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.
