SMF November 2024 update

Welcome to your November 2024 update from the Aviva Investors' Multi Asset Team.

Top 3 investment trends – November 2024

1. Trump's US Election victory: a new era of uncertainty and opportunity

Donald Trump’s Republican clean sweep has already significantly impacted markets. ‘Trump trades’ have rallied with the S&P500 up 5.9%, its strongest monthly performance so far this year, and the Mag-7 up +9.4% over November. Cryptocurrencies have also rallied, with Bitcoin up +38.5% in November alone. Performance was also supported by ongoing strength in US economic data, with weekly initial jobless claims continuing to decline and the Conference Board’s November consumer confidence measure moving up to 111.7, the highest since July 2023. However, assets sensitive to tariffs reacted more negatively after Trump announced his intention to impose a 25% tariff on Mexican and Canadian products once in office, and that China would face an additional 10% tariff. As a result, the Philadelphia Semiconductor Index, which tracks US companies operating in the semiconductor sector, was down -0.4% over the month, despite the rally amongst US equities.

2. Europe's Geopolitical landscape: steering through uncertain times

Germany and France, Europe’s largest and second-largest economies, are experiencing political and economic instability due to their budget deficits. In Germany, the federal coalition government collapsed after Chancellor Scholz dismissed Finance Minister Lindner following disagreements over the country’s deficit and economic direction, prompting a likely vote of no confidence and general election in February 2025. Forecasts indicate that economic growth in Germany will be the lowest of the G7 this year. In France, the minority government faces uncertainty over its survival as it seeks to implement a budget combining €60bn of spending cuts with tax rises to reduce its deficit. Discontentment with the budget has since led to the Prime Minister being ousted through a motion of no confidence (on 4 December). This led to underperformance of French risk assets over November, with the CAC 40 down -1.5% and Franco-German 10yr yield spreads widening to 81bps. In November, spreads reached their widest since the Eurozone debt crisis a decade ago.

3. Interest rate cuts: Central Banks chart different courses

During November, there was growing scepticism that the Fed would cut rates rapidly over the next year, with Fed Chair Jerome Powell highlighting US economic resilience and a recalibration of its policy stance. The 2-year US inflation swap rate, which shows market expectations for inflation, increased by 10bps to 2.6% over the month reflecting market concerns about a resurgence of inflation. This is consistent with the longer-term view that Trump’s policies could be inflationary. Despite this, the Fed is still forecast to cut rates in its December meeting by 0.25%. Conversely, investors now expect the European Central Bank to cut rates sooner than anticipated. There is growing potential for a 50bps rate cut in December due to weak economic growth, slowing services inflation and persistent trade uncertainty. As a result, European sovereign bonds were up +2.3%. Regarding the Bank of England’s final meeting in December, it is highly unlikely that they will cut interest rates following higher than expected employment data. 

How did SMF perform?

Growth assets

In November, investor sentiment improved following October’s caution, with broadly positive performance across global equity markets. In particular, the S&P 500 hit another new all-time high, which saw our North American equity funds as the top performers within the Equity sleeve over the month. The exceptions to this equity recovery were Emerging Market, Asia-Pacific and European equities. All three markets lagged following the threat of additional tariffs, as announced by Trump. Emerging Market equities faced additional challenges as investors questioned the suitability of stimulus measures, and Europe was hit by the additional headwind of continued political uncertainty. This backdrop meant that our overweight in US equities, which has recently been increased, was a positive contributor to performance, whilst our overweight to European equities, now a closed position, detracted in November.

Defensive assets

Fixed income also recovered in November, with positive performance across global bond markets. Our Global Investment Grade Corporate Bond fund was the top performing fixed income strategy for the month. The month started with both the Fed and BoE delivering 25bp rate cuts, continuing their rate cutting cycles. Despite more recent caution around strong US data, and inflationary macro policies, investors expect further rate cuts by the Fed in December, as well as the ECB given weak growth prospects. This fall in yields has driven government bond prices higher, particularly in Europe where markets are pricing in the potential for a larger 50bp rate cut. In terms of our active positions, this meant that our overweight position in UK Gilts was additive to performance over the month, as was our underweight to Japanese bonds as markets anticipate a rate hike by the Bank of Japan.

Alternative assets

Alternative assets also delivered a positive return over the month. This was driven by our allocation to the Aviva Investors Multi-Strategy Target Return fund.  

Key active management themes in November

• Increased our overall overweight in equities
  • We increased our equity overweight over the month, with a preference for US equities. US corporates are well-placed to benefit from expected deregulation, corporate tax cuts & fiscal measures due to be implemented by Trump.
  • We closed our European equity overweight, and reallocated into the US, given the weaker European outlook following the US election result and its trade implications

• Closed our overweight position in US Treasuries 
  • We closed our long position in US Treasuries in November. The expected inflationary impact of Trump’s policies creates the potential for higher yields for US government bonds, and hence lower bond values.

SMF Strategic Asset Allocation                                                                                                                                            

Top 10 Equity holdings

Source: Aladdin, as at 27 November 2024.The reference fund is SMF.

SMF & SMF 2 Fund Price Adjustments (FPA)

There were no fund price adjustments in November 2024.

Market outlook and positioning: what do we believe happens next?

From an active asset allocation perspective, we maintain a long position in equities with a preference for focused exposure within the US market. US equities have the potential to perform well in a disinflationary environment in which key developed central banks, including the Fed, are cutting interest rates. Regarding fixed income, central bank easing biases and the renewed focus on growth risks, particularly in Europe, are likely to place a ceiling on bond yields. In this scenario, fixed income is well-positioned to offer diversification within the portfolios.

In terms of equity regions, we have a focused overweight position in US equities. Going forward, US companies are expected to benefit from a combination of corporate tax cuts, deregulation policies and fiscal stimulus in the US. Earnings have also continued to be robust, helping to stabilise valuations.

Regarding our fixed-income allocation, we are short Japanese government bonds with an overweight position in UK Gilts. We believe that Japan is still in a hiking cycle given increasing inflationary pressures, paired with concerns around currency depreciation, which is supportive of more near-term rate cuts. In the UK, despite the recent jump in inflation driven by the increased energy price cap, inflation is expected to continue on a downward trend, and macro data remains weak relative to other developed economies. Given this, we believe our Gilt position could benefit from the growing potential for more rate cuts by the BoE relative to other developed central banks.

Any companies, or markets, mentioned are for illustrative purposes only, not intended to be an investment recommendation.

Key risks

• Investment not guaranteed: The value of an investment is not guaranteed and can go down as well as up. You could get back less than you’ve paid in.
• Specialist funds : Some funds invest only in a specific or limited range of sectors. This will be set out in the fund’s aim. These funds may be riskier than funds that invest across a broader range of sectors.
• Suspend trading : Fund managers are often able to stop any trading in their funds in certain circumstances for as long as necessary. When this happens, cashing in or switching your investment in the fund will be delayed. You may not be able to access your money during this period.
• Derivatives: Derivatives are financial contracts whose value is based on the prices of other assets. Most funds can invest partly in derivatives so that the fund can be managed more efficiently or to reduce risk, but there’s a risk that the company that issues the derivative may default on its commitments, which could lead to losses. Some funds also use derivatives to increase potential returns – this is known as ‘speculation’ – and an additional risk warning applies to those funds.
• Foreign exchange risk: When a fund invests substantially in overseas assets, its value will go up and down in line with movements in exchange rates as well as the changes in value of the fund’s investments.
• Emerging Markets: Where a fund invests substantially in emerging markets, its value is more likely to move up and down by large amounts and more frequently than a fund that invests in developed markets. Emerging markets may not be as strictly regulated, and investments may be harder to buy and sell than in developed markets. Emerging markets may also be politically unstable which can make these funds riskier.
• Smaller Companies: Where a fund invests in substantially the shares of smaller companies, it’s more likely to move up and down by large amounts and more frequently than a fund that invests in the shares of larger companies. The shares can also be more difficult to buy and sell, so smaller-companies funds can be riskier.
• Fixed Interest: Where a fund invests substantially in fixed-interest assets, such as corporate or government bonds, changes in interest rates or inflation can contribute to the value of the fund going up or down. For example, if interest rates rise, the fund’s value is likely to fall.
• Derivatives: Some funds also invest in derivatives as part of their investment strategy, not just for managing the fund more efficiently. Under certain circumstances, derivatives can cause large movements up or down in the value of the fund, making it riskier compared with funds that only invest in, for example, company shares. There’s also a risk that the company that issues the derivative may default on its commitments, which could lead to losses.
• Cash/Money Market funds : These are different to cash deposit accounts, such as those held with high-street banks, and their value can fall. Also, when interest rates are low, the fund’s charges could be higher than the return from the investment, so you could get back less than you’ve paid in.
• Property Funds: When a fund invests substantially in property funds, property shares or directly in property, you should bear in mind that: · Property isn’t always easy to sell, so at times the fund may not be able to cash-in or switch part or all of its holdings. You may not be able to access your money during this time. Property valuations are made by independent valuers, but effectively they remain a matter of judgement and opinion. Property transaction costs are high due to legal costs, valuation costs and stamp duty, all of which affect the value of a fund.
• High Yield Bonds: These are issued by companies and governments that have a lower credit rating. When a fund invests substantially in high yield bonds, there’s a higher risk that the bond issuer might not be able to pay interest or return the capital that was invested. The value of these bonds is also more greatly affected by economic conditions and interest rate movements. There may be times when it’s not easy to buy or sell these bonds, so cashing-in or switching your investment in the fund may be delayed. You may not be able to access your money during this period.
• Reinsured Funds: Where a fund invests in a fund that’s operated by another insurance company, you could lose some or all of the value of your investment in the fund if the other insurance company became insolvent.
• Long-Term Asset Funds: The fund invests partly in one or more long-term asset funds (LTAFs), giving access to sectors such as infrastructure, venture capital, private equity and debt investments. LTAFs add diversity to the fund, but it takes longer to move money out of them than from many types of asset. This could mean that in exceptional circumstances cashing-in or switching your investment in the fund may need to be delayed. To reduce this risk, we set strict limits on how much of the fund can be invested in LTAFs and monitor this closely.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited ("Aviva Investors"). Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested.

Issued by Aviva Investors UK Fund Services Limited. Registered in England No 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119310. Registered address: 80 Fenchurch Street, London, EC3M 4AE. An Aviva company.