BY MIKE COUNT, SENIOR FUND MANAGER
May was very much a month of two halves for corporate bonds, with spreads tightening in the first half, before widening in the second half as Italy’s political issues began to unfold. In addition, US President Donald Trump’s ‘trade war’ rhetoric also led to further uncertainty for market participants. As a result, investors became more risk-averse, preferring UK gilts, which duly outperformed.
May was unusually quiet for corporate bond issuance, with a number of issues pulled or postponed due to the aforementioned political issues, however we expect the market to revive in June before the summer lull. In the UK specifically, there was also some reaction to the weak economic data that we had witnessed in the first quarter. Q1 is historically weak and in 2018 was also impacted by severe weather, so we think there will be some recovery in Q2; indeed recent data backs up this view, with retail sales rebounding and consumer confidence on the rise. Therefore, we remain confident that the economy will remain fundamentally supportive for corporate bonds over the rest of the year.
We still believe that higher government bond yields are more of a risk than widening spreads. The LF Canlife Corporate Bond Fund and LF Canlife Short Duration Corporate Bond Fund therefore remain positioned short of their benchmark durations and in sectors offering more attractive spread profiles, such as financials and collateralised bonds. In particular, we continue to like the insurance sub-sector. Looking forward, the UK is currently somewhat weighed down by Brexit uncertainty and we expect more clarity on a number of issues by October.
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.
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). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at www.canadalifeinvestments.com.
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.
CLI01227 Expiry on 15 September 2018