Market Outlook:
Yesterday’s U.S. consumer price index (CPI) print reinforced our view that the hiking cycle is likely over, and the market will start looking forward to rate cuts in the second half of 2024. If the U.S. Federal Reserve cuts rates next year due to disinflation, rather than an economic slowdown, pockets of the market that have lagged this year should stage a sustained recovery.
With yields starting to come down in early November, we believe the pieces are in place for a Santa Claus rally to finish the year. Thirty-seven per cent of U.S. mutual funds have a September or October year-end, suggesting a significant phase of tax-loss selling is behind us. Moreover, corporate buybacks should start to accelerate with 70 per cent of S&P 500 companies now in open buyback windows after reporting third-quarter earnings.
Barring a major escalation in the Middle East, November and December could be excellent months for the market and rate-sensitive sectors in particular. We have a positive outlook on gold prices as rate cuts are forecasted in 2024. The U.S. Fed rate cycle has historically been a significant factor driving the price of gold. Over the past 40 years, gold has increased an average of 34 per cent during periods of central bank easing compared to an average return of six per cent during periods of tightening.
A sharp escalation in geopolitical risk in the Middle East has created uncertainty for oil markets. The initial risk premium following the events of Oct. 7 has gradually disappeared with the price of oil below where it was before the attacks. Physical crude markets are tight thanks to OPEC+ and U.S. producer spending discipline. While we remain focused on the fundamentals of the oil market, we acknowledge that momentum can play a significant factor in commodity markets.
Top Picks:
MEG Energy (MEG TSX)
Intermediate heavy oil producer that has excellent leverage to oil differentials normalizing in 2024 as the Trans Mountain pipeline goes online. Long-life, low-decline, scalable oil sands company that is unique for mergers and acquisitions. Near-term price support from possible inclusion to the MSCI Canada Index on Nov. 30 (announced Wednesday). Solid egress options such as the U.S. Gulf Coast with over 70 per cent of third quarter volumes sent there. Inflection point in 2024 where strong free cash flow will bring debt to target by mid-2024. Shareholder returns shift from 50 per cent to 100 per cent of free cash flow at that point, through buybacks that could reach eight per cent of stock outstanding.
Teck Resources (TECK.B TSX)
The saga is over but not soon enough. Teck sells metallurgical coal business to Glencore, Nippon and Posco for US$8.6 billion cash and could make another US$1 billion from assets by the time it closes in the third quarter of 2024. By the end of 2024, will have over $3 billion net cash (no debt) and QB2 will be in full gear for free cash flow before any new growth projects start in 2026. Return of capital framework suggests 30-100 per cent return of capital, probably closer to the top end in 2025. Has been trading in line with copper names recently but still a material discount. Likely 20-25 per cent upside. Generally, a difficult year with guidance revised down and CAPEX up on QB2 (Chile) from US$5.2 to $8.8 billion but will deliver low-cost copper to double copper production by 2025-26. Great copper optionality and free cash flow inflection in 2024/25
Denison Mines (DML TSX)
Uranium development company that is moving forward with permitting, environment work, testing to prepare for building the first In-situ Recovery (ISR) project in Canada. The focus is additional technical field work, lead-time equipment orders, and final permits in 2025. Physical uranium holdings could finance over half the project and essentially have sufficient capital before debt facility. Recent Wheeler River FS has co-development of two deposits under ISR method which would be a first for Canada. ISR significantly reduced capital cost and operating costs to tier one level and IRR near 90 per cent when uranium is US$65/lb. Strong cash position ($140 million). Strategic McLean Lake mill (22.5 per cent of Cigar Lake feed).
| Disclosure | Personal | Family | Portfolio/Fund |
|---|---|---|---|
| MEG TSX | N | N | Y |
| TECK.B TSX | N | N | Y |
| DML TSX | N | N | Y |
Past Picks:
Headwater (HWX TSX)
- Then: $6.05
- Now: $7.46
- Return: 23%
- Total Return: 27%
B2Gold (BTO TSX)
- Then: $5.42
- Now: $4.18
- Return: -23%
- Total Return: -21%
Trican Well Service (TCW TSX)
- Then: $3.15
- Now: $4.18
- Return: 45%
- Total Return: 48%
Total Return Average: 18%
| Disclosure | Personal | Family | Portfolio/Fund |
|---|---|---|---|
| HWX TSX | N | N | Y |
| BTO TSX | N | N | Y |
| TCW TSX | N | N | Y |
