Global equity markets were mixed in Q3 2019 with moderate gains in the US and a sharp rise in Japan offsetting declines in Asia. Ripple effects of the US-Sino trade war, Brexit and political unrest in Hong Kong further dampened investor confidence and caused companies to keep investments on hold. Overall, these intensifying political uncertainties, along with President Trump’s daily tweets, translated into high volatility across all asset classes over the three-month period.
The US Federal Reserve’s first two interest rate cuts in nearly a decade have also been driving the markets, though how long resumed monetary accommodation by the Fed and the European Central Bank can keep assets buoyant remains to be seen. While unemployment data in the US remains the best in 50 years, cracks in the global economy are becoming more evident. More than a year on now since the US first imposed tariffs on Chinese exports, the hangover impact of these ongoing trade tensions on certain industries is also becoming harder to ignore. This is particularly obvious in Autos, which can be seen through weaker Chinese Auto Sales, as well as the German Manufacturing PMI weakening to 41.7, a new low, which we are watching closely. Whilst employment numbers continue to strengthen, the pass-through from higher wages to higher inflation is still failing to materialize and there are the lagged effects of higher interest rates as well as a stronger dollar impacting investments and personal consumption. Nonetheless, as American consumers are doing their part to keep the economy humming, the US remains our biggest allocation in terms of regions.
In Q3, the portfolio outperformed the benchmark. During Q3 2019, the shape of the portfolio became less defensive with incremental addition to sectors like Financials and IT coinciding with incremental selling in Healthcare. Lloyds Banking Group and Prudential are new additions to the portfolio, while GlaxoSmithKline and BAE Systems have been removed.
In terms of sectors, our largest overweights are now Financials and Industrials. The strongest contributors to performance over the quarter include: Easyjet (due to better pricing and easing Brexit fears); Toronto-based Barrick Gold (by mirroring moves in gold prices); and Kellogg (with its ongoing restructuring). As for detractors, Covetrus, the global animal-health technology and services company headquartered in the US, was a drag after poor quarterly results but we still like it long-term. Our biggest underweights are in IT and Utilities. Whilst opportunities still exist, large cap tech stocks are plagued by regulation concerns, tech hardware by tariffs and software by valuations. Facebook’s Libra project has also caught the attention of global regulators, and that is likely to delay its launch.
Road to 2020
In our end of quarter re-rankings, the US remained first, based primarily on its relatively strong economy and the fact that the Fed has more scope to cut interest rates than any major central bank. According to the US Commerce Department, retail sales rose 4.6% in September year-over-year, fuelled mainly by e-commerce sales. Despite Brexit uncertainties, we are optimistic about investment opportunities in the UK given the low valuations and cheap currency relative to global peers. Japan rose to third as incremental opportunities emerged in September. Asia fell to fourth place given the ongoing ramifications from the trade war with the US as well as regional impacts of the flaring political protests in Hong Kong. Europe remained last given the worsening economic data and lack of reforms.
There remain two major uncertainties in the world, trade wars and Brexit. Potential settlements on both can allow opportunities in the equity markets, although clearly neither is without risk. We continue to monitor developments closely to position the portfolio accordingly.
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.
CLI01523 Expiry 31/12/2020