MCT August 2023 Market Commentary

  • Canada
  • MCT August 2023 Market Commentary
M-Asset

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.

 

 

Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. You will usually pay brokerage fees to your dealer if you purchase or sell units/shares of investment funds on the Toronto Stock Exchange or other alternative Canadian trading system (an “Exchange”). If the units/shares are purchased or sold on an Exchange, investors may pay more than the current net asset value when buying and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning units or shares of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents. Mutual funds and investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this disclosure are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may”, “will”, “should”, “could”, “expect”, “anticipate”, “intend”, “plan”, “believe”, or “estimate”, or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what Middlefield Funds and the portfolio manager believe to be reasonable assumptions, neither Middlefield Funds nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

This material has been prepared for informational purposes only without regard to any particular user’s investment objectives or financial situation. This communication constitutes neither a recommendation to enter into a particular transaction nor a representation that any product described herein is suitable or appropriate for you. Investment decisions should be made with guidance from a qualified professional. The opinions contained in this report are solely those of Middlefield Limited (“ML”) and are subject to change without notice. ML makes every effort to ensure that the information has been derived from sources believed to reliable, but we cannot represent that they are complete or accurate. However, ML assumes no responsibility for any losses or damages, whether direct or indirect which arise from the use of this information. ML is under no obligation to update the information contained herein. This document is not to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument.

  • Canada
  • MCT August 2023 Market Commentary
Close
Subscribe to Our Insights!
Flyout Form
Close
Subscribe for MCT Updates
Flyout Form UK