Market review
Despite concerns about the UK economy, the market posted a positive return of over 6.5% in the third quarter. A return of over 4% in July was followed by returns of more than 1% in August and September. Market leadership returned to the large internationally facing companies, with the large cap index increasing over 7% in Q3 compared to the mid cap index, which returned just over 2.5%.
The financial sector was once again the market leader, driven primarily by the continued strength of the banks. The materials sector was strong as the miners were boosted by the announcement of a merger between Anglo American and Canada’s Teck Resources, which is likely to boost copper production in the longer term. The industrials sector also performed well, once again driven by the meteoric rise of Rolls Royce, which gained 20% in the quarter.
From a stock perspective, HSBC was a significant contributor to market return as it enjoyed continued momentum and represents almost 7% of the benchmark. AstraZeneca, which is of a similar size to HSBC, was also another notable contributor, as it recovered somewhat from a challenging Q2.
There were some minor detractions from market performance by the real estate and consumer discretionary sectors. At a stock level, London Stock Exchange and Relx negatively contributed to market performance as investors worried about the impact of AI on their businesses although in our view there is currently very little evidence to support those concerns.
Fund activity
The fund produced a positive return and outperformed the benchmark. Once again, financials, which is our largest sector overweight, was the most positive contributor to relative performance. Within financials, insurance and banking were the main drivers of performance as the banks continued to enjoy robust trading and a long-standing insurance holding (Just Group) received a bid.
Our overweight position in materials and our underweight position in consumer staples also contributed positively to quarterly performance. At a stock level the bid for Just Group was at a large premium to the market price so was very helpful for portfolio returns. We also hold an overweight position in Anglo American so benefitted from the merger announcement mentioned above. Our notable overweight position in Glencore also positively contributed as Glencore owns a share in one of the copper mines where productivity could be improved.
The consumer discretionary and utilities sectors marginally detracted from the relative performance. Consumer discretionary underperformance was driven by concerns about the housing market outlook, despite the housebuilders reporting robust results. There was nothing notable to report from the utilities sector. At a stock level, as mentioned above the housebuilders were the main detractors, with Barratt Redrow and Taylor performing poorly. The rise of Rolls Royce also cost us some performance as we remained underweight on valuation grounds.
During the quarter we sold out of our small holdings in Segro, British Land and Allied Irish Bank. We also sold Just Group following the bid as we think it is very unlikely to be improved upon. We took some profits in Lloyds and Barclays following a strong performance but have not changed our view on them specifically.
We increased the weights of several holdings that are more exposed to US and international markets rather than the UK. These included HSBC, Informa, JD Sports, Ashtead, AstraZeneca and our copper-exposed mining companies, Glencore and Anglo American. Recognising momentum building in Diageo, we reduced our underweight position. We retained an underweight as we remain somewhat sceptical that management can improve the performance of this company in the short term.
Outlook
We remain somewhat cautious about the UK economy and are very watchful of the economic data and potential tax-raising initiatives from the Government as we approach the November Budget. However, the UK consumer is still in robust health and the banks are showing no signs of stress in their loan books. The UK stock market appears to be maintaining its momentum but is notably led by the large international companies with limited exposure to domestic concerns.
We think the US economy is likely to remain buoyant for now as the US administration incentivises capital investment through tax policy and pressures the Federal Reserve to keep rates low. We are watching 30-year US government bonds for signs of stress as US government debt levels increase, but for now the bond markets appear relaxed and yields have reduced. We will remain vigilant for changes in the data trends and stay disciplined about valuation.
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. Income from investments may fluctuate.
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.
