Market Review
As we entered the second quarter, markets were in a relatively stable position, with expectations firmly set on a path of gradual interest rate cuts on a quarterly basis. However, this stability was temporarily disrupted by President Trump’s announcement of new tariffs on ‘Liberation Day’. The announcement raised concerns over potential retaliatory measures, inflationary pressures and the broader implications for global trade.
These developments introduced uncertainty into the interest rate outlook. On the one hand, inflation concerns pointed towards the need for tighter monetary policy. On the other, worries about the potential impact on Europe’s export sector, including job losses and a slowdown in growth, suggested the case for easing. This conflicting backdrop made the likely course of action from the Monetary Policy Committee (MPC) less clear.
In May, the MPC cut rates by 25 basis points to 4.25%, in line with earlier expectations. However, subsequent market volatility and mixed economic data, including some surprising GDP figures, led to a reassessment of the pace and likelihood of future cuts. At one point, expectations for further easing were significantly scaled back.
More recently, stronger-than-anticipated GDP prints have helped restore confidence in the growth outlook, reviving the view that the MPC may continue with its previously anticipated path of gradual, quarterly rate cuts.
Fund Activity
The fund experienced some outflows during the quarter that were met by scheduled maturities. In addition, we took the opportunity to reduce our exposure to certain longer-dated assets at a point where market conditions, specifically the shape of the interest rate curve, made it favourable to do so. This also allowed us to rebalance counterparty exposure following the outflows.
Over the next three to six months, our focus will be on rebuilding liquidity while remaining alert to investment opportunities where market conditions allow.
Outlook
Despite some fluctuations in market expectations around the path of interest rates, our strategy has remained consistent. We continue to anticipate a gradual, quarterly pace of rate cuts and are positioning the portfolio accordingly.
Our focus remains on identifying genuine value rather than chasing exposure for its own sake. In the absence of compelling opportunities, whether in bank bonds, floating rate notes or broader risk assets, we are comfortable increasing exposure to short-term instruments such as UK T-bills and high-quality government or supranational agency (SSA) assets.
Looking ahead, we will maintain our barbell strategy of balancing the pursuit of long-term value while ensuring a foundation of short-dated, liquid assets. This approach gives us flexibility to respond to changing market conditions while preserving capital and to seek attractive entry points as they arise.
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.
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.
