Market review
The US economy grew by 3.1% in the fourth quarter of 2024, with robust consumer spending offsetting tighter financial conditions. Inflation edged up in November, with core inflation at 3.3%, hindering the Federal Reserve’s (Fed) progress toward its 2% target. The Fed cut rates 50bps in Q4 but emphasised a cautious approach for 2025 amid geopolitical uncertainties and strong equity markets.
The UK economy stalled during the quarter, with GDP flatlining amid weaker business sentiment following the Autumn Budget and rising employer costs. The Consumer Purchasing and Housing Index (CPIH) rose to 3.5% in November, driven by higher energy prices, while the Bank of England held rates steady at 4.75%. UK equities underperformed global peers, weighed down by lacklustre corporate earnings, but the property market provided a bright spot. Retail and industrial sectors outperformed as investors favoured higher income returns and rental growth.
Eurozone growth remained modest, propped up by strong household consumption. Inflation cooled to 2.3% in November, enabling the European Central Bank to deliver further rate cuts, bringing its policy rate to 3.0%. However, structural challenges in manufacturing and a tight labour market pose risks to the outlook.
China’s economy struggled, with weak property sector performance overshadowing targeted stimulus measures. In contrast, Japan posted steady gains, supported by accommodative policy and stable domestic demand.
Fund activity
The fund produced a positive return and outperformed its sector over the quarter. Our underweight allocation to gilts helped drive positive returns versus the sector, while our holding of high yield bonds continued to outperform over the quarter versus other fixed income assets. For equities, our allocation to US markets performed well, with the Nasdaq position outpacing its benchmark.
In addition, our tactical duration management helped offset some of the broader market weakness. We favoured short duration over longer duration bond holdings, given that shorter-dated bonds were less exposed to changing inflation expectations.
However, our underlying Japanese funds underperformed their benchmarks over the quarter.
There were limited structural changes to the fund over the quarter. We trimmed allocation from property and reallocated it across fixed income and equity. We also redistributed some of our weighting to UK, European and Asian equities to North American equities. We continued to be underweight property, instead favouring alternatives such as gold and infrastructure.
Outlook
The multi-asset team is constructive on prospects for the economic cycle for 2025. Two data points underpin that constructiveness: low unemployment and strong GDP growth. This rare combination is usually a catalyst for earnings growth that helps equity markets and in turn credit markets as it allows corporates to maintain stable cash flows and, consequently, their credit rating. This is a global phenomenon but more obvious in the US, as a global driver of economic demand.
Therefore, as we think about our asset allocation in 2025, we're positive in the medium-term on the global economy. However, we're cautious in the short-term of being overweight areas of the market that have demonstrated high levels of price momentum for quite some time now, particularly in the last half of this year. We are also mindful of the traditional post-Presidential inauguration slump in equity markets, which would offer the opportunity to buy back in at a more attractive valuation.
Our equity positioning is framed within the context of momentum versus value and what constitutes expensive valuations and cheaper value ideas; in our view, when it comes to equity markets, the US is widely considered to be more expensively valued, whilst Europe, the UK, emerging markets, Asia, and Japan look more attractively valued. However, we consider both US productivity gains and corporate earnings growth to be well ahead of the long run average, with no fundamental reason for that to change, and for this reason we remain bullish on US equities.
Elsewhere, government bonds and investment grade credit are likely to continue to form an important defensive part of our portfolios. These assets are now working more effectively as a diversifier – when bond markets have sold off in recent times, yields have come down – and investors are now buying bonds as an offset in risk-off moments. In contrast to previous rate-cutting cycles, corporate balance sheets are robust, based on long-term metrics; corporates’ internally-generated cash flows are covering their dividend payouts and capex in aggregate, and as a result the companies don’t need to issue as much debt in 2025.
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.
