By MIKE WILLANS, HEAD OF EQUITIES AND BIMAL PATEL, FUND MANAGER
The US Federal Reserve’s sudden dovish shift prompted a dramatic U-turn in the global equities market resulting in the best start to a year for a very long time. Stock markets quickly climbed back up to where they were before the Q4 sell-off even though economic indicators continued to deteriorate and GDPs growth forecasts were lowered. While the comeback allowed us to reap some profits, in the end it was driven by the Fed’s powerful pivot rather than the real economy and we remain cautious considering the number of weak spots in the backdrop.
The UK continues to suffer from Brexit, yet it has remained resilient relative to the Eurozone and our overweight in UK stocks meant we were able to benefit from high dividend yields. We still expect sterling to appreciate in the long-run and the defensive nature of the UK also makes it a low beta market. The ongoing uncertainty around Brexit also is taking its toll on ailing Eurozone economies. Germany continues to grapple with further export weakness mainly caused by the US-Sino trade war, while Italy’s populist government’s budget-deficit woes add more tension in Brussels.
In the US, two of our holdings benefited from the payments industry’s current consolidation trend. The first one was in January with First Data, a financial services company based in Atlanta, Georgia, which was acquired through a merger with Fiserv, a US provider of financial services technology. Another one of our stocks that shot up significantly was, Worldpay, which in March announced plans to merge with Fidelity National Information Services, known as FIS. Overall, considering worsening PMIs (particularly in manufacturing) we remain defensively positioned, overweight in consumer staples and healthcare but underweight in financials given flattening yield curves.
Lower for longer
One of our concerns is that Global PMIs are falling as a result of rising trade frictions. Economic indicators are known to lag equity markets, but we fear expectations for data are now too high given the rally in markets. Also, companies have not only been holding back on investment due to the plethora of political uncertainties but are also battling against a shrinking pool of appropriately skilled labour.
Perhaps more importantly is that the European Central Bank, the Bank of England and the Bank of Japan have little left in the tool box if the economy were to decline from here. Even though the Fed has more room to manoeuvre, inflation remains low and President Trump’s recent combative stance toward it is also causing some market anxiety. Nonetheless, in our view the Fed is in the driver’s seat and will be the one to watch in Q2.
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 can 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).
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.
CLI01410 Expiry 30/06/19