Market review
The first quarter of 2024 continued to be bullish for the North American equity market, with a powerful rally across the three months. Returns were led by the Magnificent Seven group of high-performing technology stocks, which collectively accounted for about a quarter of the total market cap by quarter’s end. However, the period was also marked by increasingly diverging performances within the Magnificent Seven, as Tesla and Apple slumped while the companies focused on artificial intelligence (AI) – including Nvidia and Meta Platforms – surged. Nvidia, in particular, saw returns of 81% between January and March.
Sentiment remained bullish, with an economic slowdown rather than a recession being priced into the market, and as a result expectations of an H1 2024 rate cut by the US Federal Reserve (Fed) appeared to dwindle. Inflation proved stickier than expected, chased by strong wage growth, with the US Consumer Price Index (CPI) rising by 3.2% in the 12 months to February. As a result, the market appears to have aligned more closely with our long-held view that the Fed will deliver conservative rate cuts in the latter half of 2024 or beyond.
Fund activity
The fund performed well on an absolute basis but modestly underperformed its benchmark during the quarter. A noteworthy contributor to relative performance was our underweight position in real estate, while detractors included underweight holdings in technology, specifically Nvidia.
While the fund maintained its core positioning, we made some adjustments to capitalise on emerging trends. We exited our position in Boeing due to our belief that a series of highly publicised safety incidents in recent months point to entrenched cultural failings within the company. We also exited our position in Nike as we remain unconvinced that the company’s pivot towards athleisure will generate returns. As an extension of this view, we introduced a new position in the performance footwear company On Holding, believing that this competitor will achieve greater returns by focusing on its core running shoe products.
During the quarter, we also increased our position in nuclear power provider Cameco, believing that the sector will become crucial not only for the clean energy transition, but also to support large datacentres needed for AI technologies.
Outlook
Our outlook remains optimistic. Data from the US appears to indicate that the market will achieve a soft landing with a low likelihood of recession. The country’s labour market remains resilient, with low unemployment and continued job growth across the quarter. Additionally, the strong market performance of the last six months has created a notable wealth effect among consumers, given the relatively high exposure of the average American to the stock market.
However, we believe there is still cause for caution. Inflation has proved stickier than expected and appears to have settled higher than the Fed’s target of 2%. As a result, we expect higher interest rates to be maintained at least until the second half of the year.
Additionally, while we expect the market to remain buoyant, it is our belief that the very high levels of growth seen in recent months are unsustainable in the medium term – particularly among the leaders of the Magnificent Seven. We continue to review opportunities within technology, given the sector’s strong performance across Q1. However, we believe those opportunities are more likely to emerge among smaller technology companies since the valuations of the largest players are not as attractive as they were six months ago.
Important Information
The value of investments may fall as well as rise and investors may not get back the amount invested.
Due to the underlying assets held in the WS Canlife North American Fund, the price of the fund is classed as having above average to high volatility.
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.
Promotion approved 22/04/24
