By DAVID ARNAUD, SENIOR FUND MANAGER AND KSHITIJ 'KJ' SINHA
Follow the Fed
Monetary policy continues to dominate as we hit the year’s half-way point: the Fed has been driving risk appetite once again in the global markets due to its (as well as the European Central Bank’s) dovish switch which has resulted in an unconventional phenomenon of equities and bonds rallying alongside each other. Interest rates are now forecast to stay low for even longer; thereby compelling investors into buying riskier assets and fuelling price appreciation anywhere you look. The frantic search for yield that prevailed during the 2015 to 2017 period has now returned. However, given the mounting amount of debt in the system and the growing disconnect between market prices and fundamentals, it has become critical to deploy a careful stance in asset selection.
Nevertheless, we believe the Fed’s next move will stem more from global ‘cross currents’ and a potential risk of trade-related tightening in financial conditions. While the services sector fares well on both sides of the Atlantic and unemployment data in the US remains the best in 50 years, some cracks in the global economy are becoming clear. One year on now since the US first imposed tariffs on Chinese exports, the impact of these ongoing trade tensions on the manufacturing sector (particularly in Europe) is becoming harder to ignore. Also, whilst employment numbers continue to go from strength to strength, the pass-through from higher wages to higher inflation is failing to materialise. In addition, there are the lagged effects of higher interest rates as well as a stronger dollar impacting investments and personal consumption.
As assets continue to be buoyed by the expectations for prolonged monetary policy accommodation – the global market has been pricing in four interest rate cuts by the Fed over the next 12 months – we have added duration closer to the benchmark while retaining a short positioning overall. We have also extended our overweight in the corporate investment grade space versus government bonds and continue to favour attractive valuations in the insurance sector. In terms of currency plays, we have cut our overweight in GBP on the back of heightened Brexit uncertainties, as well as adding some AUD and renewing our underweight position in USD.
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 information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. 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 Investments. 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 Document (KIID) available at www.canadalifeinvestments.com
Canada Life Investments is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
CLI01459 Expiry on 31/10/2019