Global markets broke new records this summer with sterling plunging on no-deal Brexit fears and many government bond yields, particularly in Europe, dropping into negative territory. These new lows were fuelled mainly by dovish shifts at major central banks. The US Federal Reserve and the European Central Bank, as well as central bankers from China, Australia and New Zealand promised ‘accommodation policies’ to try to stimulate slower growing economies. Some central banks are now also debating the prospect of negative interest rates. All of this has resulted in a yield rush and deep spread compression that have in effect been driving activity in other asset classes. This includes global equity markets which continue to rally on the belief that these stimulus packages could further boost corporate earnings.
While the US economic cycle seems to carry on elongating (thanks primarily to American consumers), manufacturing data and corporate investment around the world continue to show signs of weakening. Although we are concerned about these deteriorating economic indicators as well as the paralysing effect of political and trade uncertainties, we remain cautiously positive and do not anticipate a global recession to be imminent. However, we do feel that the next one could be unpleasant given the large structural imbalances, such as mounting corporate debt and higher debt-to-GDP ratios.
Navigating through the risks
In the short-term, we expect the US dollar to fall slightly given the Fed’s hints of further cuts to its main interest rate. However, a global recession would likely cause it to strengthen as a safe haven currency, which is what happened in 2008 during the global financial crisis. Sterling remains unloved and undervalued.
Equities are cheap relative to other asset classes and a good hedge against sterling weakness. Across the multi-asset range, we are currently mildly overweight equities versus our peers. In particular, UK equities are trading so cheaply in relation to their inherent and historical value that they are now valued at a notable discount compared to their global peers. In this regard, we are significantly overweight UK equities versus globally across our managed funds range.
We also have been reducing target weights in UK Commercial Property as the outlook weakens, with lower single-digit returns and increasing outflows. Although we follow an asset allocation set by Distribution Technology within the Portfolio Funds, which is currently 5% in property, we have replaced some of the directly invested exposure with a fund comprised of international REITs. This provides both better liquidity and lower exposure to UK retail property.
The value of investments may fall as well as rise and investors may not get back the amount invested.
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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.