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Deal, skinny deal or no deal?

We don’t know yet, but preparing for an uncertain future is all part of a fund manager’s job. We asked Canada Life Asset Management’s managers and research specialists what UK investors might expect in 2021 and beyond.

Stuart Taylor, Senior Fund Manager

LF Canlife UK Equity Income Fund

Looking past the alarmist headlines and contradictory soundbites from politicians and commentators, we do appear to be inching towards a deal. After years of uncertainty, financial markets are likely to welcome anything that clarifies the direction of travel. The end of 2020 could become a hat-trick of welcome news –a new US president, viable vaccines and a Brexit deal.

The performance of the UK stock market has been profoundly awful compared to other major markets. This year, to the 26th November, the MSCI UK Index is down almost 14%, while the MSCI World index is up 11% and the MSCI North America Index is up 15%. Over five years the MSCI UK Index is up 6% while the MSCI World has returned almost 82% and the MSCI North America Index has risen over 107%. Over 10 years…I think you get the idea.

It wasn’t always like this. In the 40 years leading up to the end of 2007, putting your money in UK equities was a substantially better proposition than investing in US equities. Since the 2008 financial crisis the UK market has been out of favour, almost irrespective of individual UK companies’ operational performance. Fear has driven down the valuation of companies that are perceived as being less resilient, while growth stocks – particularly technology companies – have been in high demand. The MSCI UK index of growth companies is up 18% over five years with the equivalent UK value index down 15%.

The UK stock market is lowly valued and unloved across the globe, but it is about to have a significant impediment to investment removed. The tide might be turning.

 

Kshitij ‘KJ’ Sinha, Fund Manager

LF Canlife Global Macro Bond Fund

Brexit will be an ongoing process, not a one-time event. Whatever is agreed (or not agreed) by the end of 2020 will be a comma in an ongoing conversation with Europe which, as our largest and closest trading partner, cannot be simply ignored. Together with the US and China, the EU is shaping global trade and regulations. The UK will continue to be strongly influenced by Europe’s trading model and regulatory choices.

Whether we have a deal or no deal, the immediate effect will be an increase in trade friction. If there is no deal then, amongst other things, we would expect volatility in UK corporate spreads in early 2021. However, this should prompt further support from the Bank of England (BoE) in the form of quantitative easing and that should help to keep spread widening in check.

On a more positive note, it is worth remembering that the sterling corporate bond market is highly international and is not tied purely to the health of the UK economy. Unlike the FTSE 250 Index, which is primarily made up of UK-focused companies, 60-70% of issuers in the IBOXX Sterling Corporate Bond Index are global names or have diversified exposure to the world.

With regards to long-term trends for UK companies, trade barriers can only make trade lower and slower. Whatever policies the UK government may introduce to combat this remain to be seen.

 

Bimal Patel, Fund Manager

LF Canlife Global Equity Fund

Without the details of a deal it’s hard to tell whether the investment case for the UK and Europe will be strengthened or hindered by Brexit, but any outcome will provide welcome clarity for businesses and investors.

Much depends on agreement – or the lack of it – over contentious Tier 1 issues. These are: level playing field rules to prevent businesses in one country gaining a competitive advantage over those in other countries; the emotionally fraught issue of fisheries; and enforcement.

Non-Tier 1 issues are being agreed relatively easily as both sides attempt to play the same negotiating game of agreeing as many non-controversial issues as possible and using that as leverage to demand concessions on Tier 1 issues. The EU is asking the UK to back down over level playing field rules or risk losing agreements reached so far on smaller issues. The UK appears to be doing the same thing, creating a stalemate that is unlikely to be resolved until the negotiators have political approval to make concessions on Tier 1 issues.

The UK may be more willing to compromise on fisheries than on level playing field rules that reduce the UK’s sovereignty. However, there is an argument that the Brexit hardliners have been weakened by the departure of Dominic Cummings and the election of Joe Biden who, unlike Trump, is anti-Brexit. This could make the UK more willing to compromise.

It does seem within the realms of possibility that a "zero tariff, zero quota" deal in goods can be achieved, ensuring that UK goods are not subject to EU tariffs and other trade barriers.

 

Steve Matthews, Fund Manager

LF Canlife Sterling Liquidity Fund

Brexit and COVID-19 have pushed short-term UK rates down to zero. Covid was the catalyst for the BoE to reduce its base rate to 0.10%, but Brexit has always been in the minds of the MPC members. The need for accommodative action by the BoE to support businesses and individuals throughout the pandemic has been exacerbated by fears of the additional costs and burdens to the UK economy following its departure from the EU.

Once we are all vaccinated and able to travel and socialise, the accumulated debt from the pandemic will still need to be repaid, against the backdrop of as yet unknown relationships with Europe and the US.

This has put pressure on short-dated GBP markets, with six-month UK T-bills issued in November at a minus 0.10% yield. The base rate is still positive, but the market is pricing in the potential for further cuts into negative territory, which is compressing yields and making relative value harder to find.

We have opted to take a barbell approach by building overnight and one-week positions whilst adding high-quality, 13-month fixed income paper to lock in returns and protect yield in the event of further cuts.

Brexit has also had an impact on relationships with European counterparties, in response to which we have carried out research to identify areas where business may be interrupted. Whether choosing brokers or considering replacement of overnight deposits, we have taken steps to ensure that alternative arrangements are in place, so that on 2nd January 2021 the LF Canlife Sterling Liquidity Fund will be well positioned to continue business as usual.

 

Eleni Poullides, Senior Fund Manager

LF Canlife UK Government Bond Fund

The backdrop for gilts in 2021 will be an economy recovering from the effects of COVID-19, which caused one of the biggest contractions in UK GDP on record. Uncertainty post Brexit will be high and trade disruption will reduce economic activity, especially in the first few months of the year, delaying economic recovery.

After falling sharply in 2020 as a result of COVID-19, inflation is likely to rise as demand recovers and Brexit causes higher import costs and shortages of some goods. However, low wage growth and spare capacity should keep inflation at subdued levels. A no-deal Brexit would pose higher inflation risks due to the introduction of tariffs and a fall in the value of sterling.

Gilts will be supported by exceptionally loose monetary policy and purchases by the BoE under its quantitative easing programme, which was recently increased by £150bn to £895bn. This will see the BoE buying gilts until at least the end of 2021, helping to absorb government borrowing in response to the pandemic. The BoE might deliver a further small cut in interest rates, but we do not expect interest rates to move into negative territory.

Gilt yields have risen recently in response to positive news on the timing and effectiveness of COVID-19 vaccines, and yields should see further upward pressure in 2021. However, the combination of Brexit, a weak recovery, the low level of interest rates and gilt purchases by the Bank of England should keep gilt yields at exceptionally low levels.

 

Joanna Turner, Head of Property Research

Regardless of whether a trade deal is secured with the EU – and our expectation is that a deal will be reached – we expect the UK property market to remain resilient over the long term, after an inevitable period of short-term disruption and adjustment in 2021.

Some sectors of the property market will continue to outperform the average due to stronger underlying demand and more resilient income growth. These areas include logistics and standard industrials, long-leased alternative assets like primary healthcare, regional residential markets and supermarkets.

Other sectors, such as retail, leisure and hospitality, will continue to struggle due to ongoing structural shifts in consumer demand, the growth of e-commerce and the effect of COVID-19 and Brexit on occupier markets.

However, on a five-year view our forecasts suggest positive total returns on average for most sectors after a short-term downturn this year and into 2021. We would recommend a cautious approach over the short-term, focusing on resilient income sectors, with the prospect of capturing growth opportunities from sectors more correlated to the general economy once the recovery is established.

Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.

Due to the underlying assets held, the price of the UK Equity Income Fund is classed as having above average to high volatility.

 

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors.

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. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness.

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 at https://www.canadalifeassetmanagement.co.uk/

Please note that while Canada Life Asset Management Limited and Canada Life Limited are regulated as stated above, property management and the provision of commercial mortgages are not regulated activities.

The LF 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.

 

Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

CLI01765

Expiry: 31/03/2021