Market review
It was a positive quarter for fixed income investments, particularly in the corporate space. Europe continued to perform well as the region is still perceived to be a relatively safe haven thanks to its institutional predictability. Despite trade tensions and political pressure on the Federal Reserve (Fed) raising concerns over its independence, the US showed surprising resilience. However, the housing market is slowing down, while labour market data has been negatively revised and is not as robust as previously thought. There was also growing pressure on the Fed from the US administration to deliver further rate cuts, despite inflation remaining higher than expected and still not returning to target.
On a positive note, the US economy is still showing no signs of entering a recession, thanks to a strong boost to consumption. However, the slowing labour market and additional pressures from the US administration had already pushed the Fed to deliver the first rate cut of the year in September. However, the Fed did not signal the start of a major easing cycle, tempering investors’ expectations over further rate cuts next year and providing support to the US dollar.
In the eurozone, the overall investment backdrop has also been one of resilience and strong consumer behaviour. Despite various announcements from the Trump administration over trade tariffs, Europe is continuing to benefit from the 15% blanket rate negotiated by the European Commission in the summer.
Meanwhile, the European Central Bank (ECB) brought its cutting cycle to a pause, having cut by 100bps so far this year. It has signalled that any additional cut would be data-dependent and decided on a meeting-by-meeting approach We do not currently anticipate further cuts for the foreseeable future. Inflation in the Eurozone is hovering very close to the 2% target and the economy is not showing signs of an imminent recession. There is optimism about the fiscal stimulus, particularly the announcement of defence and infrastructure spending by the German government. However, France’s sovereign debt rating was downgraded in this quarter, the UK’s long-term borrowing costs continued to rise, and there are concerns over debt sustainability in both countries.
Fund activity
The fund produced a positive return that slightly outperformed the benchmark. Significant sales included that of Credit Agricole Insurance owing to its valuation, while remaining fund activity mainly consisted of duration trades in our US dollar and sterling allocations. Returns benefitted from general sterling weakness, as concerns grew over the fiscal situation in the UK. Returns in Japanese yen also suffered as the currency showed weakness on the back of the Bank of Japan remaining hesitant to hike rates.
Outlook
Having passed the peak of post-Global Financial Crisis valuations for credit markets, we have switched to a more cautious stance and increased our focus on stock selection. We expect the financial sector- in particular global banking groups - to continue to perform well.
Interest rates are likely to stabilise in Europe, and at some point next year there could be discussions about hiking rates. We expect further rate cuts to be delivered in the US and the UK, where the cutting cycles began after that of Europe.
It is important to emphasise that, in the US, the Fed is more divided than ever, leading to the possibility of a change in outlook. For example, Powell's mandate is expected to end in May next year, with a dovish chair likely to be his replacement. As a result, we think there are still likely to be curve movements, not necessarily because the economy requires them, but because of the risk of the Fed becoming more politicised.
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. Currency fluctuations can also affect performance.
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.
