Market Review
The fourth quarter was broadly positive for the performance of equities and fixed income, as several of the themes driving markets in previous quarters reversed and expectations of a 'soft landing' became more widespread.
Markets were buoyed by signs that the US Federal Reserve (Fed) might start to change its monetary policy stance and move into a rate-cutting cycle, as inflation showed signs of slowing. In November, the US Personal Consumption Expenditure index – a key bellwether for the Fed – rose at an annual rate of 3.2%, which was below many economists’ expectations. Broad-based falls for commodity prices, with the price of a barrel of oil falling from $90 in October to just over $70 by the end of the year, further strengthened sentiment.
During the fourth quarter, equities rallied significantly as doubts spread over whether a recession would indeed materialise. With the market increasingly pricing in rate cuts, investors increasingly expected a soft landing and benign inflation.
Generally speaking, UK gilts outperformed EUR and USD denominated government bonds during the quarter but were still left lagging YTD. Corporate spreads also tightened over the quarter across the three currencies, with USD corporates outperforming on a total return basis.
Fund Activity
During the period, the fund produced a positive return but underperformed its comparator benchmark. Over the quarter, the larger fixed income allocation of the fund – specifically corporate bond exposure – contributed the most to absolute performance. Exposure to inflation-linked bonds and UK government bonds also produced a positive return.
Holdings in global equities - particularly North America and Europe - were bigger contributors to returns than UK equities.
Elsewhere, our exposure to REITs made a positive contribution as REITs’ sensitivity to gilt yields enabled them to benefit from recent upward movements. This offset our exposure to the underperforming UK property fund. Our small holding in a global infrastructure fund also generated positive performance.
Outlook
With inflation starting to approach central bank target levels and expectations for more robust economic conditions strengthened, this broadly improved investor sentiment. However, some forward-looking indicators – such as manufacturing data – have yet to provide signs of an obvious economic recovery and a continued rise in debt delinquency rates during the fourth quarter suggests higher rates are starting to bite.
Overall, we need to see some reconciliation between economic data and financial market pricing before we can be strongly confident about a soft landing.
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 Portfolio 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 funds. 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.
Promotion approved 26/01/24
