Market Overview
After a broadly positive first quarter, the second quarter of the year proved to be more of a mixed bag for financial markets. Some assets did well, with tech stocks producing strong outperformance thanks to excitement around artificial intelligence (AI), and that positivity extended into some other risk assets. Volatility continued to fall as there were no signs of broader financial contagion, after issues in the US banking sector earlier this year. However, sovereign bonds lost some ground as inflation remained sticky and central banks continued to raise rates. Commodities also struggled across the board, with Brent crude oil prices down for a fourth consecutive quarter.
Inflation remains particularly challenging for central banks, with the Federal Reserve (Fed) hiking by another 25 basis points in May and further hikes from both the European Central Bank (ECB) and Bank of England during the quarter. As hikes are negative for the value of sovereign bonds, US Treasuries, German Bunds and UK Gilts all fell significantly.
More positive economic data helped boost equity markets as the threat of recession, particularly in the US, was pushed back for now. The raising of the US debt ceiling by Congress during the quarter was also positive, as the threat of a US debt default was taken off the table.
Fund Review
In the period under review, the portfolio generated a positive return and outperformed its benchmark.
Absolute returns were largely driven by positive equity performance. Stock markets were buoyed by better-than-expected economic data and a surge in interest in artificial intelligence (AI), which boosted many of the large-cap technology stocks that have led markets higher in recent years. Our equities portfolio was boosted the most by our allocations to US equities.
This was counteracted to an extent by the challenges facing fixed income markets during the second quarter of the year – including the higher inflation backdrop and the ongoing interest rate hikes – detracted from performance. Our unhedged global bond holdings were negatively impacted by a stronger sterling during the quarter.
Meanwhile, our alternatives allocation had a negative impact on performance as the commercial property sector continues to struggle in a rising rate environment.
We added a multi-asset global infrastructure strategy during the quarter.
Outlook
The outlook for fixed income is positive, despite central banks continuing to raise rates to combat sticky core inflation. We are encouraged by the falls in the headline rate of inflation during the second quarter. The rate hiking cycle could pause or end by the end of the year as inflationary pressures start to ease. Any further hikes will likely be wage growth data-driven and contingent on financial conditions.
Our outlook for public equities is more mixed. We remain bearish on UK equities, which tend to be very cyclical and reliant on a strong economic upturn given the number of mining, oil & gas and industrial businesses in the index. Commodities have been down four quarters in a row after the Russian invasion of Ukraine, and we remain cautious.
We believe the outlook is better in the US, Japan and Europe. The Japanese central bank is pursuing a monetary policy that keeps its currency weak, which benefits the country’s export-orientated stock market. European companies potentially have to contend with further rate hikes by the European Central Bank, although the bloc has emerged relatively unscathed from a recession that started at the end of last year. In the US, the AI revolution is having a considerable impact on some of the large tech companies, such as chipmaker Nvidia, which helped to lift US equity markets more broadly. Furthermore we note the rate hikes by the Federal Reserve don’t appear to be affecting the US consumer significantly.
The value of investments may fall as well as rise and investors may not get back the amount invested.
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.
The LF Canlife Portfolio Funds may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the funds. The value of the property is based on the opinion of a valuer and is therefore subjective.
This document is issued for information only by Canada Life Asset Management. 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 in the literature section.
Promotion approved 15/08/23
