July 2024 Market Commentary


Macro Update

by Dean Orrico, President & CEO and Robert Lauzon, Managing Director & CIO

The S&P 500 generated a total return of 15.3% in the first half of 2024, reaching 33 new all-time highs along the way. The year-to-date return breaks down into 7.1% from improved earnings expectations, 7.4% from expansion in the forward P/E multiple to 21x, and 0.8% from dividends. Sectors linked to the AI thematic led to the upside with Information Technology and Communication Services returning 28% and 27%, respectively. Index heavyweights Microsoft, Nvidia, Apple, Google, Amazon, and Meta contributed to 62% of the index’s total return.


YTD S&P 500 Return Attribution
Sector Weight at Start of 2024 (%) YTD Return (%) Contribution of S&P 500 Return (basis points)
Info Tech 29 28 815
Comm. Services 9 27 229
Financials 13 10 132
Health Care 13 8 98
Industrials 9 8 68
Cons. Discretionary 11 6 61
Cons. Staples 6 9 55
Energy 4 11 42
Utilities 2 9 22
Materials 2 4 10
Real Estate 2 -2 -5
S&P 500 100 15 1529
Source: FactSet, Goldman Sachs Global Investment Research

The TSX Composite Index generated a total return of 6.1% in H1, lagging the U.S. market by nearly 10%. Half of the performance gap occurred in June when the TSX returned -1.4% compared to 3.6% for the S&P 500. Canada’s three largest sectors – Energy, Materials and Financials – all had negative returns in June which explains most of the underperformance. With the Bank of Canada (BoC) entering an easing cycle on June 5th, we expect relative performance of Canadian equities to rebound. Historically, the TSX has averaged double-digit gains 12 months after the first BoC rate cut. We believe core defensive yield sectors including utilities and real estate are particularly well-positioned to outperform in the second half.

A common theme that emerged during the second quarter was normalization. Growth expectations, inflation and employment stats have all been easing from abnormally high levels recently. We view this trend positively as long as the pace of easing remains gradual and these key economic data return to more normalized levels. We do not forecast a recession in the U.S. or Canada over the next twelve months and believe the evolving macro landscape is conducive to continued strong performance from North American equity markets.

Although the Federal Reserve has maintained its hawkish stance in recent press conferences, the normalization of economic data we are witnessing supports an easing cycle in the U.S. as well. As of early July, Fed Funds Futures are implying an 80% chance that the Fed will cut rates at its September meeting. With the Fed now having less to worry about on both sides of its dual mandate, we agree that a rate cut in September would be an appropriate course of action.

Seasonality factors imply that the good times will continue for the S&P 500 this month. The Index has been positive in July for 9 consecutive years with an average return of 3.7%. Moreover, the first half of July has been the best two-week period of the entire year going back to 1950. That said, August has been a negative month the past two years while September has historically been the worst month of the year for the Index. Given the impressive run the market has been on so far this year, we would not be surprised to see a short-term pullback in major indices during the second half of Q3. Given our positive outlook on the macro landscape, and the projected earnings growth over the next two years, we view any near-term market pullback as a healthy correction within a broader secular bull market and would be buyers of high-quality stocks on weakness.


Real Estate

Middlefield Fund Tickers & Codes: MREL / MID 600 / RS / RS.PR.A / RA.UN

by Dean Orrico, President & CEO

Canadian REITs returned 0.6% in June, outperforming the TSX Composite by 2%. The BoC’s decision to cut rates on June 5th is showing early signs of improving sentiment for the sector. There are four BoC meetings remaining in 2024 and the Overnight Index Swaps market is currently pricing nearly two more full cuts from the BoC before year-end.

Bank of Canada Implied Overnight Rate and Number of Hikes/Cuts
Source: Bloomberg. As of July 3, 2024.

Canada’s population has increased 8% since pre-pandemic levels. Supply of real estate has not kept pace with the surge in demand, causing Canada’s per capita housing stock and shopping centre space to fall by 2% and 6%, respectively. As a result, vacancy rates have fallen to historic lows within these asset classes and rents have gone up. Apartment rents have risen close to 10% year-over-year while retail property leasing spreads are also in the high single-digits. The operating environment is as attractive as it has ever been for these asset classes and when investor focus finally shifts from interest rates to fundamentals, we expect a swift re-rating in REIT unit prices.

Chartwell Retirement Residences (CSH), a longstanding core holding in our real estate portfolios, announced a $345 million equity raise in June at a price of $12.20/unit. The proceeds will be used to fund $763 million of acquisitions, including 10 residences in Quebec across two relatively new seniors’ housing portfolios that will lower the company’s overall portfolio age by three years. CSH becomes the first REIT in Canada to issue equity in 2024 – showcasing a unique cost of capital advantage not available to most REITs in the current environment. CSH has consistently exceeded expectations over the past several quarters as occupancy levels recover towards pre-pandemic levels in its residences. With the population of those aged 85+ expected to grow by 50% over the next decade in Canada, CSH’s portfolio of private retirement homes should benefit from steadily increasing demand and limited new supply. In this light, we are happy to see CSH opportunistically acquire new assets and view the announcement favourably.



Middlefield Fund Tickers & Codes: MHCD / MID 625 / SIH.UN

by Robert Moffat, Portfolio Manager

Healthcare had a strong first half of 2024 with the MSCI World Healthcare Index returning 8.2%. Like the broader market, the sector’s performance was driven by a concentrated group of companies, many of which contributed to the outperformance of our healthcare funds in H1. Middlefield Healthcare Dividend ETF (TSX: MHCD) generated a total return of 13.5% including its monthly distributions of $0.05/unit which equate to a dividend yield of more than 5%.

Eli Lilly (LLY) was a standout performer in H1, returning 55.8%. This outperformance follows a return of 60% in 2023 and has resulted in LLY becoming the largest healthcare company in the world with a market capitalization of $850 billion. Although enthusiasm for the company’s diabetes and obesity franchise has driven recent performance, we are becoming increasingly positive on what may come next from LLY’s product pipeline. LLY hosted an investor event which highlighted an oncology pipeline that, in both qualitative and quantitative terms, has grown robustly over the past five years. It includes a promising breast cancer drug that will show phase 3 data in H2’24 and a lung cancer drug being studied in combination with Merck’s Keytruda – also in phase 3. LLY has a broad range of earlier-stage oncology assets as well, including radioligand therapies that it acquired from Canadian biotech company POINT Biopharma last year. LLY is in the enviable position of having a steady stream of free cash flow from its successful GLP-1 drugs to fund its R&D efforts, which should position the company for further growth beyond the near-term opportunity in diabetes and obesity.

On the topic of R&D, we are witnessing a sea change in how companies are approaching early-stage clinical research. AI has the potential to revolutionize R&D efforts by improving drug discovery timeline and accuracy. Machine learning algorithms can predict how potential drug candidates will interact with targets in the body before they are tested in the clinic. These capabilities will allow researchers to pursue only the most promising drug candidates in the clinic and avoid much of the trial-and-error that goes into research today. Danaher, a leading provider of R&D tools and services, recently hired a Chief Data & Artificial Intelligence Officer who previously founded Google’s Cancer Pathology project. We expect similar announcements to follow from companies that are involved in R&D and for AI to reshape the drug discovery process over time.




Middlefield Fund Tickers & Codes: MINF / MID 265 / MID 510 / ENS / IS / IS.PR.A

by Robert Lauzon, Managing Director & CIO

Infrastructure presents a compelling long-term investment opportunity due to its defensive characteristics, while offering high dividend yields and inflation protection. Several key themes are driving growth in the sector, including accelerating data center demand, energy security, and the upgrading of existing infrastructure. Our Infrastructure Dividend Split Corp. (TSX: IS) capitalizes on these trends and specifically invests in dividend-paying securities across various sectors within the infrastructure asset class, including Utilities, Energy, Real Estate and Industrials. The current macro environment is supportive of global infrastructure spending due to a constructive earnings outlook, improving CapEx cycle, increased fiscal focus on infrastructure, and a falling interest rate environment. Historically, infrastructure assets have performed well in periods of “Above Trend and Falling” rate environments. The Bank of Canada’s recent 25 bp rate cut marks the start of an easing monetary policy, which will be a significant tailwind for the sector.

AI remains a powerful theme and has shifted focus towards power supply reliability. This shift has brought renewed attention towards the Utilities sector, where several growth opportunities are emerging. Electricity usage in North America is facing a significant ramp up due to GenAI, data center expansion, rising electrification, and manufacturing onshoring. Additionally, extreme weather, aging infrastructure, and increasing reliance on electricity will require substantial investments for a more resilient electric grid. Growing power demand coupled with rising renewables penetration has increased the need for electric transmission investment. Furthermore, growth of data centers will also provide a tailwind for natural gas demand, as it can offer a reliable and lower-emission alternative to coal while complementing the intermittent nature of renewable power sources, which are key attractions for large corporations.

Pembina Pipelines (PPL) is a Canadian midstream player positioned to capitalize on growing energy needs. PPL owns an extensive network of pipelines, operates gas gathering and processing facilities, and is growing their export terminals business. A key driver for PPL is the positive final investment decision to proceed with their Cedar LNG project, which will add 3.3M tons per annum of export capacity, facilitating the transportation of Canadian gas to overseas markets. Additionally, Pembina Gas Infrastructure (PGI) announced a joint venture with KKR, acquiring a 50% working interest in Whitecap’s Kaybob complex for $420M. This move strengthens Pembina’s gas processing capabilities, drives volumes through its network, and unlocks future growth opportunities.


Technology & Communications

Middlefield Fund Tickers & Codes: MINN / SIH.UN / MID 925 / MDIV

by Shane Obata, Portfolio Manager

The first half of 2024 witnessed a clear divergence in the tech landscape: Artificial Intelligence (AI) stocks skyrocketed 33.3%, while non-profitable tech stocks suffered an 18.7% decline. This trend underscored the growing dominance of AI, a theme we anticipate will continue to shape the market.

AI Stocks Significantly Outperformed Non-Profitable Tech Stocks in H1'24
Source: Bloomberg. As of June 30, 2024.

Our investment approach aligns with this shifting paradigm. We remain steadfast in our conviction that AI-focused semiconductor companies are poised for sustained growth, given their pivotal role in fueling the AI revolution. While concerns about AI disrupting the software sector persist, we believe select companies like Adobe (ADBE) are not merely surviving but positioned to thrive. ADBE’s recent guidance lift shows that it is not being negatively impacted by AI and serves as a testament to its ability to weather the broader macroeconomic headwinds noted by other software companies. Adobe’s competitive advantage stems from its relentless investment in research and development, coupled with a portfolio of high-quality offerings that foster customer loyalty and result in high switching costs. This positions Adobe as a durable franchise, driven by recurring revenue and robust operating margins. Furthermore, the company continues to integrate AI into its platforms, positioning itself as a beneficiary of the AI boom rather than a casualty. While Adobe has been returning capital through share buybacks, we anticipate a dividend initiation within the next 18 months, further enhancing its appeal to investors.

Although the hardware sector shows promise, we are maintaining an underweight allocation due to the superior potential we see in semiconductors. Our Innovation ETF (TSX: MINN), which returned 33.6% in H1’24, underscores our successful navigation of stage one of the AI investment cycle, which we expect will endure into 2025. As a result, we plan to maintain our focus on large-cap growth stocks, prioritizing those with established market leadership, sustainable competitive advantages, and exposure to the burgeoning AI landscape.



Middlefield Fund Tickers & Codes: MID 800 / MID 161 / MID 265MRF FT LP / Discovery FT LP

by Dennis da Silva, Senior Portfolio Manager

Gold has performed well in 2024, rising by 12.9% in the first half of the year. Gold demand remains supported by central bank buying, retail investment flows in Asia, and ongoing geopolitical uncertainty. Gold has made headlines this year, breaking record highs multiple times between mid-March and mid-May, trading above US$2,300/oz for most of Q2. With gold remaining steady above the $2,300/oz mark, current equity prices imply a gold price that is at a historically large discount to the spot price. The S&P/TSX Gold Sub Industry returned 12.4% in H1’24 and we expect the prevailing discount to narrow in H2.

After breaching the US$5.00/lb level in mid-May, the price of copper has fallen as investors have shifted their focus to demand in China. Despite the decline in June (-4.4%), copper remains a strong performer in the commodities group, up over 12.2% in H1’24. A structural supply deficit is emerging in the copper market driven by declining grades, resource depletion, and increased input costs. Ultimately, these supply dynamics should dictate the direction of copper prices over the medium-to-long term and we believe copper prices will trend higher over the coming months.

Oil hit a 4-month low after the June 2 OPEC meeting where the cartel agreed to gradually phase out voluntary cuts of 2.2 million bpd over the course of 12 months. What was perhaps overlooked in the announcement is that OPEC’s decision to return barrels to the market is closely tied to supply/demand conditions.

The latest round of monthly reports from the IEA, OPEC and EIA support firm global oil demand. With summer travel season kicking into high-gear and supply still being managed by OPEC+, oil prices rose 6.3% in June and finished above US$80/bbl. In Canada, the Trans Mountain expansion continues to ramp up smoothly. In mid-June, the company stated that the pipeline was operating at 80% of capacity, or in line with contracted volumes.

Natural gas prices have recovered from historically low levels of sub-US$2.00/mcf to momentarily break through US$3.00/mcf in mid-June. The start of summer has been hot, leading to higher power burn per cooling degree day. With LNG terminal maintenance completed, a hot start to summer and increased power demand from data centres, gas prices may have room to rise further in H2, which bodes well for our gas-focused stocks including Tourmaline, Arc Resources and Peyto.



Exchange Traded Funds (ETFs)

Fund Ticker Strategy
Middlefield Real Estate Dividend ETF MREL Real Estate
Middlefield Healthcare Dividend ETF MHCD Healthcare
Middlefield Sustainable Infrastructure Dividend ETF MINF Sustainable Infrastructure
Middlefield Sustainable Global Dividend ETF MDIV Sustainable Global
Middlefield Innovation Dividend ETF MINN Innovation
Middlefield U.S. Equity Dividend ETF MUSA U.S. Dividend

Mutual Funds (FE | F)

Fund Ticker Strategy
Middlefield Global Real Estate Class MID 600 | 601 Real Estate
Middlefield Global Healthcare Dividend Fund MID 325 | 326 Healthcare
Middlefield Global Infrastructure Fund MID 510 | 501 Global Infrastructure
Middlefield Income Plus Class MID 800 | 801 Equity Balanced
Middlefield Global Dividend Growers Class MID 181 | 182 Global Dividend
Middlefield U.S. Dividend Growers Class MID 710 | 701 U.S. Dividend
Middlefield Global Agriculture Class MID 161 |162 Global Agriculture
INDEXPLUS Income Fund MID 435 | 436 Canadian Dividend
Middlefield Canadian Dividend Growers MID 148 | 149 Canadian Dividend
Middlefield Global Energy Transition Class MID 265 | 266 Energy
Middlefield Innovation Dividend Class MID 925 | 926 Innovation

TSX-Listed Closed-End Funds

Fund Ticker Strategy
MINT Income Fund MID.UN Equity Income
Sustainable Real Estate Dividend Fund MSRE.UN Sustainable Real Estate
Middlefield Global Real Asset RA.UN Real Assets
Sustainable Innovation & Health Dividend Fund SIH.UN Innovation & Healthcare

TSX-Listed Split Share Corps. (Class A | Preferred)

Fund Ticker Strategy
E-Split Corp. ENS | ENS.PR.A Energy Infrastructure
Real Estate Split Corp. RS | RS.PR.A Real Estate
Infrastructure Dividend Split Corp. IS | IS.PR.A Infrastructure

LSE-Listed Investment Fund

Fund Ticker Strategy
Middlefield Canadian Income Trust MCT Canadian Equity Income

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments, including ETFs. 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.

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