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
The fund produced a positive return that slightly outperformed its benchmark. In equities, the fund benefitted from a tactical tilt towards AI and hardware companies owing to these stocks’ dominance during the quarter. Both the slight overweight towards UK equities and the underlying fund selection were also positive for performance. The new Nasdaq 100 ETF holding was another contributor, significantly outperforming the benchmark. By contrast, the active North American holding fell short of the benchmark over the quarter, as the underlying fund has taken a more diversified approach and has been underweight the Mag 7.
The shorter-duration funds held outperformed the benchmark over the period. However, the fixed income allocation within UK gilts and index-linked bonds dragged on returns. Meanwhile, physical property has continued to underperform.
In terms of portfolio changes, we added two new funds into the emerging markets equity holding for added diversification and exposure. Within property we continued to reduce our physical property holding in favour of global infrastructure.
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.
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 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.
Promotion approved 22/07/24
