Market commentary
Global equity markets began the second quarter with a spate of significant volatility sparked by US President Trump’s ‘Liberation Day’ on 2 April, in which he unveiled custom reciprocal tariffs on the US’s trade partners. Investors baulked, and the US market lost roughly $5trn in two trading days. A week later, the White House offered a 90-day reprieve, triggering the index’s biggest one-day rally since 2008.
During May, the US began exploring trade deals with individual countries, including China, which had been most affected, helping ease fears of a wider trade war. The ratings agency Moody’s cut the sovereign rating one notch, citing spiralling interest costs.
Currencies led the repricing – the dollar index fell around 10% – while equities regained their tariff losses.
The market’s focus then turned to geopolitics, as Israeli strikes on Iranian facilities caused oil prices to spike before a ceasefire, spare OPEC+ capacity and soft demand helped bring the quarter-average back to $67 per barrel.
Across the Atlantic, there was similar policy turbulence. UK Chancellor Reeves used her March Spring Statement to reduce the 2025 growth forecast to 1% and justify deeper welfare cuts, while the Bank of England surprised with a 0.25% rate cut to 4.25% in May. The European Central Bank meanwhile delivered its eighth cut in June, trimming the deposit rate to 2% after core inflation slipped to 2.3% in May, while Berlin embarked on a €115 billion defence-and-infrastructure spending plan.
However, the quarter provided a powerful backdrop for growth assets: US markets rallied strongly to the end of June, while the tech-heavy stocks delivered an even greater total return. UK market advanced but lagged its global peers as the strength of sterling and subdued commodity names capped upside. Meanwhile, gilt yields drifted lower, bolstering fixed income returns and cushioning April’s volatility spike.
Fund activity
The fund produced a positive return that was behind its benchmark. Hedged global bonds provided positive relative returns over the quarter, which helped offset the non-hedged allocation, while our overweight to global high yield was also positive.
Our structural overweight versus the benchmark helped enhance return as European equities rose, while our holding in North American equities provided strong returns post liberation day, offset slightly by the depreciation in the currency.
Shorter duration underperformed longer duration in the second half of the quarter, reducing the overall performance of the fixed income allocation, however given the level of political uncertainty we have been comfortable offsetting shorter term gains for lower volatility.
In terms of fund activity, during the quarter we reduced allocation to fixed income in favour of equities. Within equities, we increased exposure to industrials and technology, benefiting from the boost in large and mega caps following ‘Liberation Day’. We have also adjusted its regional equity exposure, favouring both Europe and Asia Pacific, with selective allocation towards the US, and reduced allocation to UK equities. Given that US dollar exposure has been unhelpful owing to its decline this year, the fund has been hedging some exposure and over the quarter moved from unhedged to GBP hedged gold.
Within fixed income we have lowered overall duration while focusing on higher quality rated bonds. On a regional basis, allocation to both UK government and investment grade corporate bonds has been reduced in favour of global investment grade.
Outlook
In our view, over the longer term structural fiscal imbalances in Western nations present a material long-term risk. Governments in many developed economies show little progress on fiscal prudence. Persistently high deficits, combined with growing debts and their service, costs are likely to place long-term upward pressure on sovereign yields.
We believe that short-duration fixed income offers greater resilience in a rising rate environment, retaining a clear preference for short-dated bonds, which limit exposure to duration risk and allow greater agility as the rate cycle evolves. In our view, long-dated sovereign debt is structurally challenged.
For 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.
For the near term, we believe calls for the ‘death of the dollar’ are premature. Likewise, the end of ‘US exceptionalism’ may not be quite as soon or as significant as some suggest. The West is still running arguably loose monetary policy, with more interest rate cuts looming. Fears of a tariff-induced recession are so far not turning into reality, while geopolitical tensions beyond tariffs are not accelerating. We are positioned for markets to continue ‘climbing a wall of worry’ as they have done since the initial US administration blink following the initial tariff announcement.
US equities continue to be priced more highly than other markets due to the higher growth outlook and better structural position, and this appears reasonable to us. European equities remain stimulated by German spending announcements. Meanwhile, Asian equities are priced exceedingly cheaply and have structurally attractive currencies. We also find banks an attractive sector, as the steep yield curve and lessening regulatory backdrop are helpful to earnings.
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.
