Market review
At the end of last year, there was a sharp drop in yields as markets accelerated their expectations for central bank rate cuts in the year ahead. Early in January, it became clear that this was inconsistent with real world data and markets accepted that it was unlikely the Bank of England (BoE) would be cutting the base rate by 250bps in 2024. The question in the first three months therefore became more focussed on when interest rates would start moving.
Whilst inflation continued to fall in the first quarter, market participants have been concentrating on wage data, which has proven to be relatively stubborn. Although food prices and fuel prices are coming down, the data on wages remains sticky, meaning that the BoE has had little choice but to maintain interest rates during the quarter, saying that there will be no rate cut until inflation moves in a sustained manner closer to, or below, its target level.
Fund activity
During the quarter, the fund produced a return in line with its benchmark. We started looking for more shorter-term, high quality, opportunities due to a shortage of stand-out bargains in the market. When there was a scarcity in one- to two-week maturities, we also increased overnight deposits. Having brought the average maturity of the fund down at the end of 2023, we maintained this through the start of 2024 as we felt markets had overstated the potential for cuts in the bank base rate.
Proposed regulation changes will require us to hold more overnight deposits and weekly maturing assets to offset potential liquidity issues. The fund would be permitted to hold 15% of the fund in government or government agency assets against the weekly maturing assets target. We have always maintained high positions in such assets but, cognisant of this requirement, we added one-year Dexia, Asian Development Bank, and Transport for London, to lock in returns in liquid assets. We’ve also been buying 2026 assets that have been offering Sterling Overnight Index Average (SONIA) + 35bps for two-year floating rate covered bonds.
Outlook
We continue to believe that the BoE will likely cut rates by around 75bps in 2024, a view we have held since October 2023. We do not believe that it would make sense for the Monetary Policy Committee (MPC) to cut rates earlier than needed, as an earlier-than-necessary rate cut could lead to inflation rising once more.
We also believe that there is more evidence required before an initial rate cut will be approved. Lower food and fuel inflation, alone, will be insufficient to counter current wage and services inflation. The headline numbers point to wages staying higher for longer and, perhaps, will prove to be a drag on the speed that inflation reduces. The MPC will also have a close eye on the impact of the near 10% increase in the National Minimum Wage.
As such, we do not believe that the initial cut will take place in the first half of the year, more likely August at the earliest.
Important information
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.
The WS 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.
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 19/04/24
