The Magnificent Seven led a rally in US equities last year, but what does 2024 hold? We think the US economy looks to be in pretty decent shape, which means a broadening of the rally is a real possibility. This means smaller companies could do well, and it could mean Canadian equities play catch-up too. The Canadian market is dominated by financials and energy, which are both sensitive to any abatement of recession fears, and real estate, which could see valuation uplifts when rates are cut. Middlefield Canadian Income (MCT) is our preferred way to play this theme, and numbers collated by the team there show the Toronto Stock Exchange is highly correlated to the S&P500 ex Magnificent Seven. With valuations modest, and MCT’s shares themselves trading on a c. 19% discount, we think this could be an interesting performer in 2024. Notably the discount of Canadian to US equities is as great as has been seen over the past 30 years, meaning any normalisation could be a powerful tailwind to returns.
An additional attractive feature of the market and the trust is the yield. MCT has just raised its annual payout again, to 5.3p from 5.2p in 2023. This equates to a dividend yield of 5.3% at the time of writing, with the dividend paid in equal quarterly amounts. Dividend growth has been an impressive 8% per annum over the past five years. With rates set to normalise, we think this will lead to renewed interest in equity income.
Dean Orrico, manager of the trust, notes that MCT’s primary asset class weightings are financials, energy and real estate which, in aggregate, represent over 80% of the portfolio. Each of these sectors trades at a discount to their US counterpart, possesses significant free cash flow and is expected to continue increasing dividends in 2024 and beyond.