BY KSHITIJ SINHA, FUND MANAGER
Economic & market overview
Developed market bond returns were strong in April, with positive performance for European and US government debt. Corporates once again outperformed sovereign debt, with European corporate and financial bonds adding value over German bunds and US corporates and financials outpacing US treasuries.
The main event in Europe was the first round of French presidential election, with Emmanuel Macron and Marine Le Pen making it through to second round. The result was relief for the market and in line with polling forecasts. First quarter earnings got off to a very strong start in Europe. With 15% of market cap having reported by the end of April, 43% of companies beat consensus earnings estimates by 5% or more and just 20% missed. Key industrial and export numbers in Europe continued to beat expectations. The European Composite PMI came in at a fresh 6-year high of 56.4 – while retail sales showed a gain of 1.8% month-on-month, versus consensus expectations of 0.7%. Despite a strong macro backdrop, several European Central Bank (ECB) speakers pushed back against expectations of an early rate rise before the end of quantitative easing (QE). Confidence in inflation rebounding remains low, while risks to the economic outlook have been described as balanced.
In the US, President Donald Trump’s administration released preliminary details on its proposed tax reform package. While lacking detail, the key takeaways were a reduction of corporate tax rate to 15% and reduction of individual tax brackets from seven to three. The current administration’s tax plan is expected to face large obstacles getting through Congress. Earnings for US companies were strong, with 77% of the S&P 500 Index coming in above expectations on earnings-per-share (EPS) and only 16% below. The market is also pricing in a 70% chance of a Federal Reserve rate hike in June, up from 57% the previous month.
In the UK, Prime Minister Theresa May triggered an early election for 8 June. Polls indicate the Conservative Party’s majority would increase substantially, providing more domestic political stability through the Brexit talks.
There were no surprises at the Bank of Japan’s (BoJ) monetary policy meeting, though the outlook for economy was clearly brighter. Earnings season also got off to a positive start.
The Canadian dollar ended the month weaker against US dollar (-1.95%), Euro (-4%) and Japanese yen (-1.5%). The strong performance of the euro was mainly driven by receding political risks in Europe.
The CF Canlife Global Bond Fund once again benefitted from its overweight position in investment grade credit, with corporate bonds outperforming government debt over the month. For professional adviser use only
As previously noted, we expect to remain in a macro environment featuring improvements in underlying economic data – with the recovery being supported by expansionary fiscal policies in the US and, to some extent, in Europe. Inflation should also move gradually higher on the back of these reflationary policies and a recovery in commodity prices, which should prompt the Fed to proceed with at least two additional rate rises by year-end.
The reflationary trend supports short duration positioning at current levels and an overweight allocation to corporate bonds against government debt.
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.
CLI00781 Expiry on 22 August 2017