By DAVID ARNAUD, SENIOR FUND MANAGER & KSHITIJ SINHA, FUND MANAGER
What a difference a quarter makes
The dynamics of the fixed income market completely changed during Q1 mainly in response to the US Federal Reserve’s dovish policy shift. The hold on interest rate hikes this quarter meant investors were again satisfying their thirst for yield by indiscriminately buying duration and going down the rating spectrum as curves flattened and higher beta bonds outperformed. Despite worries about weakening economic indicators, especially in manufacturing, corporates ended the quarter on a strong note and outperformed government bonds. This benefited our overweight in the corporate space particularly in sectors such as insurance which we felt were disproportionally punished in last year’s sell-off. We also continued to generate returns from unhedged foreign exchange exposures, for example from the appreciation of the US dollar and Japanese yen versus CAD.
Although we expect the Fed to make fewer interest rate rises than were previously forecasted for this year, mounting debt whether corporate or sovereign is a concern and our main focus will be on avoiding potential pitfalls given the risky climate. We have therefore maintained our short duration positioning and continue to carefully reduce our corporate bond holdings, focusing on attractive values and high quality names. We have increased exposures to short-dated US Treasuries, considering the more flattening yield curve in the US, and implemented an overweight in pound sterling by purchasing UK gilts. Despite slower growth, we predict GDPs in developed economies to be supported by private consumption, wage increases and prospects for further relaxation in fiscal policies. This should put upward pressure on bond yields, especially at a time when central banks have committed themselves to normalising monetary policies by ending asset purchases.
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).
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.
CLI1404 Expiry on 30/06/2019