Equity markets rallied in March for a fifth consecutive month. In British Pounds, the Fund generated a total return of 5.2%, outperforming both the Benchmark and the TSX Composite which returned 3.9% and 4.4%, respectively.
We continue to see encouraging signs that the market rally is broadening beyond large-cap tech stocks. Cyclical and value sectors led the market higher in March after lagging in the previous two months. This trend supported a 4.1% monthly return (local currency) in the TSX Composite Index and vaulted it to a new record high. Surging prices of key commodities, including oil, copper and gold, have provided a boost to Canada’s resource industries with the TSX materials and energy sectors returning 15.4% and 7.3% in March, respectively.
The underlying strength in commodity prices can be partially attributed to an increasingly positive economic backdrop. Purchasing manager indexes in both the U.S. and China are back above 50 – the level that differentiates between expansion and contraction. Meanwhile, the IMF now expects the world economy to grow faster than it had predicted in January, when it forecast growth of 3.1% in 2024. These data points all support robust consumer spending and manufacturing activity which traditionally leads to higher demand for commodity inputs. U.S. crude futures have surged to $85 a barrel for the first time since October, bringing its year-to-date advance to 19%.
Exploration & Production companies, which the Fund is overweight, were positive contributors to performance in Q1. Peyto, Canadian Natural Resources and Suncor generated total returns of 27%, 21.8% and 19.1%, respectively. These companies possess attractive operating leverage given their low levels of debt and streamlined operations. Assuming commodity prices remain strong, we expect them to re-accelerate their capital returns to shareholders in the form of dividend bumps, share buybacks and special distributions.
Materials have been another area of strength in Canadian markets recently. The Fund has increased its exposure to the sector by initiating positions in Nutrien (NTR) and B2Gold Corp (BTO). NTR sells key crop inputs and services including potash and nitrogen to the agriculture industry. Potash prices rose 8% in March, boosting the outlook for topline growth, while the company sharpens its focus on operations by adopting tele-remote and autonomous mining technologies. BTO is an intermediate gold producer with a strong growth profile. The price of gold has risen to all-time highs in recent weeks and is trading above US$2,400/oz. BTO owns and operates three producing gold mines in Mali, Namibia and the Philippines, in addition to several exploration assets. It is a proven operator in the Canadian mining sector with a diversified asset base. We were encouraged to see BTO’s costs come in below its original guidance range in 2023 and are optimistic that it can continue to improve its operating efficiency in the years ahead.
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