MCT August 2023 Market Commentary

  • Canada
  • MCT August 2023 Market Commentary

North American equity markets continued to rally in July, bringing the winning streak of the S&P to five months. The Fund generated a NAV total return of 1.1% during the month, outperforming the benchmark return of 0.8%. Given the increasingly positive market narrative, which includes cooling inflation, robust earnings, the end of monetary tightening and firming growth, the recent momentum is likely to continue.

Market breadth is a key factor to gauge the sustainability of the recent market rally. We are encouraged by the July outperformance of certain sectors that lagged in H1, including energy and financials. The TSX composite has lagged the tech-concentrated S&P 500 by more than 12% year-to-date, leaving plenty of runway for sustained outperformance.

The valuation gap between Canadian and US stocks has widened, presenting a compelling opportunity for UK investors seeking North American equity exposure. Many of Canada’s cyclical sectors are trading well below long-term average price to earnings multiples, including energy (55% of long-term average), real estate (78% of long-term average) and financials (80% of long-term average). Canadian equities are offering approximately twice the equity risk premium as the US, a dynamic that has only occurred 6.3% of the time since 2000. As a result, we believe the current risk/reward profiles of Canadian investments are significantly more attractive versus the US.

In addition to short-term market dislocations, we are seeing a growing set of long-term opportunities stemming from a robust US capital expenditure cycle over the coming decade. Canada is the US’s largest trading partner in goods and services, with nearly $1.3 trillion in bilateral trade since 2022. The Biden Administration’s two landmark infrastructure bills – the $1 trillion Infrastructure and Jobs Act and the $780 billion Inflation Reduction Act – will provide a plethora of opportunities for Canadian companies that sell products and services in the US. Accelerating decarbonization and the embrace of sustainable energy is at the core of our view. For example, the Inflation Reduction Act includes $370 billion of funding for improving energy security and accelerating clean energy transitions. Our holdings in Canadian energy and utilities have significant exposure to US markets and are positioned to benefit from elevated investments in renewables and grid improvements. The US LNG industry is also expected to experience rapid growth over the coming decade, expanding its export capacity from 13 Bcf/d to over 30 Bcf/d by 2030. Our holdings in Canadian natural gas companies and pipelines will benefit from billions of dollars being spent on bringing Canadian and US natural gas to LNG export terminals.

The voluntary production cuts announced by OPEC+ in April, together with Saudi Arabia’s unilateral cut of 1 million barrels per day in July are beginning to have their desired effects. WTI crude futures increased 15.7% in July while US crude stocks experienced the largest weekly draw since the EIA began tracking weekly data in 1982. Our positions in energy producers performed well this month, highlighted by Whitecap Resources and Tourmaline generating total returns of 14.1% and 9.5%, respectively.




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  • Canada
  • MCT August 2023 Market Commentary
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