Market overview
The third quarter ended with the first clear policy turn of the cycle. In September, the Federal Reserve (Fed) cut interest rates by 25bps to 4.00-4.25%, citing softer labour indicators and rising downside risks. Projections hint at two further moves if conditions warrant. Europe was steadier, with the European Central Bank (ECB) holding its deposit rate at 2%. In Japan, policy stayed dovish despite turbulent politics, while a weaker yen supported exporters and local indices. In this environment, equities rose. The US equity market set fresh highs, with AI and semiconductors leading broader tech and communication services. Cyclical stocks were mixed, while the energy sector fell after turbulence in crude oil prices.
Europe, which had started the year with strong performance, was patchy. Construction and real estate broadly held up, while autos weakened following cuts to earnings guidance from some of the marquee names. Defensive stocks continued to deliver. In the UK, gilts cheapened towards quarter-end, owing to a combination of fiscal concerns, global duration concerns, and increased gilt supply.
The Chinese stock market has risen 16% this year, with the last quarter accounting for most of that due to investor confidence in AI and technology. However, its economy continued to see pressure from weak manufacturing, deflation risks and property.
The dollar varied against major currencies but moved higher against the yen through most of the third quarter. Gold reached record highs owing to hopes of central bank easing as well as the continued geopolitical issues.
Fund activity
During the quarter, the fund produced a positive return that was ahead of the benchmark. Our underweight to UK government and inflation-linked bonds, in favour of UK corporate bonds, provided a positive return over the quarter. The tactical allocation to European infrastructure, US utilities and gold was also positive for returns. Although underweight versus the benchmark, we are overweight alternatives and underweight UK property.
Equities, although providing robust absolute returns, underperformed their benchmark over the quarter. With strong gains from only a few sectors, we are comfortable with our current allocation and prefer the broader diversification in the underlying funds’ stock selection to help manage future market volatility.
In terms of fund changes, we reduced UK fixed income, reallocating to global fixed income. UK fiscal policy continues to reduce the appeal of UK fixed income. Within equities, we opened a small position in European banks. As policies kept rates steady over the quarter, euro area lending re-accelerated in the third quarter, boosting potential earnings growth in banks entering fourth quarter. We reduced our US equity holdings to a more neutral position, having increased the allocation post ‘Liberation Day’, but remain overweight versus the benchmark.
We continue to be overweight gold but have been trimming to keep the allocation to 2%, reinvesting these profits into European infrastructure as Europe looks to increase its infrastructure investment by up to 1.5% of GDP.
Outlook
In the near-term, monetary policy is shifting cautiously as inflation trends diverge between the major central banks. For investors, concerns are rising around elevated AI valuations and seemingly circular investment between the biggest companies, despite continued appetite by investors to keep fuelling this technology. We are watching this closely as we reassess portfolios heading into the fourth quarter. Meanwhile, global growth momentum is softening, and risk sentiment is increasingly data-dependent. In this environment, we favour selective risk. Investment-grade credit remains attractive, but tight spreads limit upside.
For the longer term, in our view, most developed economies’ long-dated sovereign debt is structurally challenged. We retain a clear preference for short-dated bonds, short-duration fixed income offers greater resilience in a rising rate environment, limiting exposure to duration risk and allowing greater agility as the rate cycle evolves.
To us, equities represent a more robust inflation hedge than fixed income and cash. Our positioning remains modestly overweight equities, with an emphasis on quality businesses capable of defending margins. Firms with strong pricing power, resilient balance sheets, and consistent cash flows are best placed to navigate prolonged inflationary conditions.
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.
The WS Canlife Portfolio Funds may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the funds. The value of the property is based on the opinion of a valuer and is therefore subjective.
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.
