Market overview
The global equity market began the first quarter positively, as markets adjusted early to the change of government in the US. Initially the election of Donald Trump drove optimism, fuelled by Trump’s pro-business policies, particularly those affecting energy and financial companies, and investors maintained a relatively bullish sentiment towards risk assets. However, Trump’s imposition of wide-ranging tariffs on all the US’s main trade partners drove an escalation in trade tensions.
The tariffs, initially ranging from 10% to 50%, hit global markets, and prompted swift retaliation from China, the EU, Canada and elsewhere. The sell-off in equity markets was expected to slow the global economy and may even push it into a recession. The US bond market and the US dollar both reacted, with long bond yields rising and the US dollar weakening.
Meanwhile, GDP in China continues to slow amid weak consumer confidence and expectations that the Trump tariffs will impact export-oriented sectors.
Fund activity
During the quarter the fund produced a negative return and underperformed the benchmark, with selection detracting from returns while allocation contributed. By sector, industrials, consumer staples and materials dragged the most on performance, although this was offset to an extent by gains from consumer discretionary, technology and financials.
At the stock level, Alibaba and BNP Paribas (where we were overweight) and Tesla (where we were underweight) were the largest contributors to relative performance, while Alphabet, Target and Cameco were the main detractors.
In terms of portfolio changes, we added AIA, a high-quality insurance company in Asia, and added homebuilder PulteGroup on a structural shortage of housing in the US. We also added to our holding in Alibaba.
We sold out of Smurfit Westrock, a packaging company operating globally, as we found more competing opportunities elsewhere. We also sold some smaller discretionary companies, including Yum China and Align Technologies, as being more likely to struggle in an economic slowdown, Align in particular. Having become more cautious on the oil price outlook, we sold down Exxon Mobil to a neutral weighting.
Outlook
Investors are asking whether US exceptionalism has ended, while companies are trying to determine whether they can build factories in the US and protect margins. They are likely to wait for tax incentives before breaking ground.
Countries around the world are grappling with tariff volatility. There is uncertainty as to how much is negotiable. If the US intends to use tariff revenue for tax cuts, it stands to reason that some tariffs may be longer-lasting and less negotiable.
Important Information
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.
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.
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.
