Market review
The only trade in town – technology – has continued, with US tech stocks up nearly 8% (in sterling terms) in the second quarter, dominating UK equities and broader US equities, both up 4%. The Mag 7 group of stocks were the standout winners, with hardware and artificial intelligence (AI) leading the charge. This skewed overall returns as multiple sectors were negative over the quarter, including European equities, which were flat to down after the unexpected announcement of elections in France towards the end of June.
Otherwise, the focus for markets remained on central banks and elections. The Federal Reserve highlighted that inflation was falling but that there was no rush to cut rates. The underlying numbers highlight the predicament. Overall inflation is trending sideways, and still some way above the 2% target, with shelter and rents still boosting CPI, which is forecast to exceed 3% this year. This scenario points to few, or no, US rate cuts in 2024. Meanwhile US growth is slowing, with markets forecasting 2.3% for 2024 and 1.8% for 2025.
Stocks and bonds have priced in no recession. According to the BofA Global Fund Manager Survey, a year ago 26% of fund managers expected a hard landing, with only 3% predicting no landing. Now the numbers have almost reversed, with 26% predicting no landing and only 5% predicting a hard landing. However, unemployment is drifting up, job creation has become more concentrated to fewer sectors and other leading indicators have tipped down.
Fund activity
In the second quarter, a much narrower equity performance than formerly hugely benefitted the US tech/growth names in the portfolio. The main detractor remains the REIT and infrastructure allocation, where the high correlation with long-dated gilt yields continues to have a negative impact. The barbell approach continues to work well, with the income from the holdings that are underperforming the market still generating income that is well covered by their respective business model.
The asset class allocation remains evenly split between equities and bonds, as it has been for the past 18-24 months.
In the global equity portfolio, several new acquisitions included Amgen (a US drugmaker), Metso (Finnish mining equipment), and Smurfit Kappa (paper packaging). These names are ‘higher dividend’. Fund inflows were also added to current positions in both the UK and global. Ares, a US real estate company, was sold, and GRID, a battery storage UK infrastructure IT was sold after we lost conviction in the business model. The outlook for REITs and infrastructure names remains challenging, hence our underweight allocation to alternatives.
The bond allocation continued to move shorter in duration, and low coupon bonds have been gradually replaced by higher coupons over the period, in line with our ongoing aim of maximising income without risking capital loss.
Outlook
We forecast most assets to rise while inflation remains subdued and central banks are cautious. In our view, Europe and Asia have more attractive valuations and growth prospects than the US, where the market is very concentrated, highly valued and offers a low yield.
We believe that fixed income returns will be small but positive, forecasting little change to yields and investment grade spreads. Although high yield spreads are relatively tight, the default rate in the lower part of the high yield market is creeping up.
UK equities are potential beneficiaries of the new Labour government boosting housing and infrastructure spending and easing planning regulations. The UK market is also cheap and may attract more merger and acquisition activity. Nonetheless, capital gains tax changes and fiscal constraints could drag on returns. European equities are recovering from the manufacturing recession, but, as in the UK, growth is tepid. The European Central Bank is expected to cut rates further, in our view with limited impact.
US equities are driven by the Mag 7, especially the hardware and AI names, which have strong growth prospects and profitability. However, we believe the market is overbought and expensive, and may face some profit taking and rotation. In addition, smaller companies are still struggling and have negative earnings growth.
For more information, read our latest Asset Allocation view and outlook.
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 fund may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the fund. 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.
Promotion approved 22/07/24. All data as at 30.06.2024
