IG U.S. Taxpayer Portfolio – Global Fixed Income Balanced Series F

Portfolio Commentary<br> Q4 2023

Highlights

① Improving growth sentiment and the possibility of an end to central bank hiking cycles led to a rally in equities and bonds and a positive total return for Q4 2023.

② The fourth quarter sent stocks and bonds prices higher.

③ The earnings outlook is improving, as forward-looking indicators turn positive.

Portfolio Overview

The IG US Taxpayer Global Fixed Income Balanced Portfolio had positive total returns for the period, slightly underperforming its Global Fixed Income Balanced peer group.  

The fourth quarter of the year can be characterized by a moderation in inflationary pressures, increasingly dovish central banks and an upturn to the global manufacturing cycle. In the U.S., the Fed signaled a shift in monetary policy from a “higher-for-longer” stance to prospective rate cuts. Europe has also experienced a similar easing of inflationary pressures and central banks signaling rate cuts in 2024. Equity gains in Asia were generally positive, although China was a notable outlier to the overall strength of Asian markets as a result of a looming real estate crisis and regulatory uncertainty. 

The portfolio continues to favour equities over bonds, and within equities select Asia-Pacific and Canadian equities. The portfolio holds a less favourable view on U.S. equities. 

Fixed income (64%), foreign equity (28%) and Canadian equity (8%) make up the bulk of this fund.

Portfolio: Upside surprises to growth drive strong equity performance.  

Performance contributors

Higher exposure to equities
+ A higher equity exposure versus peers benefited the portfolio given a substantial rally into year-end. 

Higher exposure to Taiwan equities 
+ A higher exposure to Taiwan was positive given outperformance from the country as a result of some easing of tensions with China and close ties to the artificial intelligence theme. 

Higher exposure to European peripheral countries 
+ A higher exposure to Spain and Italy benefited the portfolio over the period given relatively strong growth data and improving investor flows in contrast to other developed European countries. 

Performance detractors

Lower exposure to U.S. equities 
- The portfolio holds a cautious stance on U.S. equities, which detracted from performance given U.S. outperformance on resilient growth compared to other developed markets. The prospect of rate cuts in 2024 also spurred equity performance over the quarter. 

Lower exposure to the U.S. technology sector
- The portfolio held a lower exposure to the U.S. technology sector over the period given indications of elevated labour costs, which should compress margins. The position was a detractor from performance given the sector continued to outperform broad U.S. equities. 

Portfolio Returns: Q4 2023

Total Return 1M 3M YTD 1YR 3YR 5YR 10YR Since Inc. (April 11, 2022)

IG U.S. Taxpayer Portfolio – Global Fixed Income Balanced F

2.76

7.10

8.43

8.43

     

2.30

<strong>Market Overview</strong>: The last quarter of 2023 set a positive tone for the new year.

The fourth quarter saw a rally in most asset classes and sectors. Yields went down, sending both stocks and bonds higher. The markets aggressively priced in an economic “soft-landing”, which impacted valuations across the board. U.S. stocks began the quarter with a forward price-to-earnings (P/E) ratio in the mid-17s, but ended close to 20, a significant increase.

Bond yields went up a lot during the year, yet the fourth quarter's rally sent the US 10-year Treasury yield down to 3.87% (the exact same level at which it ended in 2022).

Canadian equities finished the year strongly, with the  S&P/TSX Composite Index increasing by 7.25% (and ending the year up 8.12%). Information technology led the rally, with returns of 23.9% for the quarter, while energy was the only sector to decline.  

<strong>Market Outlook</strong>: Economic indicators point towards U.S. recovery.

Central banks in Canada, Europe and the U.S. are expected to lower interest rates at some point in 2024. Signs show the manufacturing and earnings slump is fading, and the era of high inflation and interest rates is coming to an end. There are more indicators pointing to a U.S. recovery rather than a recession.

The earnings outlook is now brighter, as previous economic soft spots recede, and forward-looking indicators turn positive. Valuations shifted in the fourth quarter of 2023 to reflect this improved outlook. This means that some early-year volatility is possible, as the markets digest the latest macro-economic data and determine if their optimism was warranted or exaggerated.  

To discuss your investment strategy, speak to your IG Consultant.