Market review
Most assets rose in the first quarter, while inflation continued to creep downwards. US economic data was strong, and consensus is no longer for a recession this year.
All eyes remain on central banks and the likelihood for rate cuts. After months of dovish talk from the Federal Open Market Committee (FOMC), the narrative turned more hawkish in February. The number of expected rate cuts has since dropped substantially. By the end of the quarter expectations were for 0.65% of US rate cuts this year. At its March meeting, the UK’s Monetary Policy Committee implied that the Bank of England could bring forward its first interest rate cut to June.
Japanese and North American equities rose by 12% and 10% respectively over the quarter, with Japanese equities reaching highs last achieved in 1990, driven by cheap valuations, inflation (for the first time in 35 years) and a weaker currency. Global markets overall saw 10% growth over the period. However, the bulk of US equity returns were driven by the Magnificent Seven group of leading technology stocks, leading to concerns over the breadth of the rally.
Fixed income returns were broadly flat. With inflation in the US falling more slowly than expected over the quarter, treasuries were weaker. Corporate bonds generated positive returns as spreads tightened. The high yield market produced strong returns, mirroring the bullishness in equity markets.
Fund activity
The fund produced a positive return that was slightly behind the benchmark. Relative return was hindered by the fund’s being slightly overweight bonds (which were flat over the quarter) and underweight equities (which generally rose). The overweight to both Japanese and North American equities helped on an absolute return basis as both regions performed well over the quarter.
With the number of expected US rate cuts having dropped substantially, and the changing dynamics in both inflation trends and monetary policy for the UK and US, we sold exposure to US Treasuries, in favour of UK gilts. We also sold the last of our exposure to inflation-linked bonds, in exchange for short-duration corporate bonds.
The fund reduced exposure to UK equities to a neutral weighting. We implemented a new position in the Nasdaq 100 index by selling down part of the active North American fund. Much of our conviction is driven by the belief that growth will outperform as a style, and our optimism over continued profitability in the US technology sector.
We continued to increase the allocation to gold over the quarter, balancing out the overall weight to alternatives while also reducing the exposure to physical property.
Outlook
US inflation is trending down, and markets expect a return to 2% CPI. With geopolitical pressures sending oil higher, the last fall in inflation is taking longer than anticipated. In the UK and Europe, the inflation outlook is lower, implying rate cuts earlier in 2024. US corporate earnings are forecast to remain robust, driven by a small number of technology-focused companies.
Equity valuations are nearer the top of their recent range, increasing our caution on near-term prospects. European fixed income could outperform treasuries if the European Central Bank cuts rates earlier than the Fed. In the UK, the labour market remains strong. UK equities struggled at the start of the year, but with oil and commodity prices higher, some large cap names outperformed.
In Asia, recent emergence from structural deflation weakened the Japanese yen and drove a strong equity market rally. We believe Japanese equities could continue to perform well. Our optimism is growing in respect of China’s domestic demand and macro data. However, given the concerns over geopolitics and trade tensions with the US, the headwinds for China remain significant.
There will be a number of elections this year, the most relevant to markets being in the US. Should Trump regain the presidency, his proposed tariffs are likely to be inflationary and disruptive.
We believe equity markets can continue to generate positive returns, with growth outperforming as a style, and maintain our optimism over continued growth in the US tech sector outweighing higher valuations. After a weak first quarter for fixed income, we could see stabilisation in bond yields, which would help performance.
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.
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