Market Overview
The UK equities market was volatile in the second quarter. Things began positively with a 3.7% gain in April, as concerns around the global banking sector eased and contagion fears subsided, with investors beginning to look beyond the Silicon Valley Bank (SVB) episode.
However, sentiment soured in May and June as inflation once again became a concern. Many commentators had been expecting the UK’s inflationary situation to improve during these months, but the figures continued to disappoint, with core inflation actually increasing.
The Bank of England (BoE) acted more aggressively than most commentators expected and the market was therefore surprised with a base rate rise of 0.5%. This exacerbated concerns about a looming UK recession and created further debate around what the central bank is likely to do next.
Financials were the main positive contributor to UK equities, as UK bank results were largely untroubled by concerns linked to SVB and First Republic. This was mainly down to the higher accounting standards UK banks are held to. Elsewhere, companies within the consumer staples sector suffered as bond yields rose and the materials sector had a poor quarter due to miners being negatively exposed to weak data coming out of China.
Fund Review
Over the review period, the fund produced a slightly negative return but was ahead of its benchmark.
During this time, the communications sector was the largest positive contributor to the fund’s relative performance despite having a weighting broadly equal to the benchmark. Financials were another main contributor to relative performance, with two of our top individual contributors being Burford Capital and 3I Group. Burford was the largest individual contributor and enjoyed gains from the progression of its lawsuit against Argentina. The fund’s largest negative contribution to relative performance over this period came from the industrials sector.
At a stock-specific level, the fund’s underweight exposure to HSBC negatively contributed to relative performance versus the benchmark as the bank was a strong performer in the market. Meanwhile, our overweight holding in Anglo American negatively impacted relative performance, as miners suffered from the unexpectedly weak recovery of China.
There were no major changes to the fund’s positioning over this period, although exposure to housebuilders was trimmed in May. We made this adjustment because housebuilders have suffered as mortgages become more expensive, and the BoE’s more aggressive stance looks likely to exacerbate this issue in the upcoming months. The fund’s exposure to banks was maintained as they are very well capitalised and able to deal with any stress in the housing market, but which has thus far failed to be notable in their results.
While we appreciate the current inflationary climate will be difficult for many, especially those with floating-rate mortgages, we feel this negativity is overblown. Equity valuations are already reflecting this negative sentiment, which is why we are more positive about the situation than some of our peers.
Outlook
In line with our view that concerns around the UK market may be exaggerated, there are areas of potential interest we will be watching over the coming quarter. While miners have experienced weakness so far this year, these are cash-generative companies that would benefit from commodity prices stabilising. Similarly, we are also optimistic about the outlook for oil companies as they continue to benefit from robust oil and gas prices and are highly cash generative.
Looking ahead, the fund remains positioned for UK consumer resilience but set at reasonably low levels of risk before building higher conviction is justified. While we believe the UK’s situation is not as bad as the consensus view as we feel predictions of a severe recession are misplaced, we do not yet see the need to push ahead and take on more risk in the portfolio. Additionally, the fund remains positioned to reflect our view that bond yields will remain higher for longer and this should benefit the ‘value’ areas of the market.
Important Information
The value of investments may fall as well as rise and investors may not get back the amount invested.
Due to the underlying assets held in the LF Canlife UK Equity Income Fund, the price of the fund is classed as having above average to high volatility.
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.
Promotion approved 20/07/23
