Equity markets snapped back in November, erasing losses from the previous three months. In British Pounds, the TSX Composite generated a total return of 5.7%. The rise in equities was fueled by a combination of falling bond yields, subsiding inflation and lower commodity prices.
Consumer prices in Canada increased by 3.1% in October, down from 3.8% in September. In response to the downward trend in inflation, the Bank of Canada opted to keep interest rates unchanged for the third consecutive meeting on 6 December. While the decision was anticipated, policymakers have adopted more neutral language with regards to monetary policy, suggesting increased confidence that current rates are sufficiently restrictive to bring inflation back to the 2% target. Looking ahead to 2024, we expect the Bank of Canada to begin cutting rates in the first half of the year if the rate of inflation continues its current path.
The Fund’s core sector exposures, which tend to be more sensitive to movements in interest rates, are well-positioned against the current backdrop. In November, Canada 10-year bond yields declined 51 basis points, settling at 3.55%. The sharp decline in yields renders GICs and other fixed income investments less attractive on a relative basis – a headwind that dividend strategies have been facing for nearly two years. Canadian real estate, utilities and pipelines all delivered high-single-digit returns in November, yet they have still generated negative returns on a year-to-date basis. Despite the magnitude of the recent rally, we believe it represents the early stages of a prolonged recovery in Canadian dividend-paying stocks that should continue in 2024.
The Canadian financials sector generated a total return of 10% in November. Canada’s Big 6 Banks reported fiscal Q4 earnings in late November which helped boost sentiment in the sector. CIBC was a standout performer, returning 14.7% in November on the back of solid year-end results which were highlighted by tight expense control, better-than-expected capital reserve ratios and improved visibility on the credit performance of its commercial real estate portfolio. RBC, which returned 10.7% in November, delivered record Q4 and year-end results for revenue generation and reiterated its timeline for acquiring HSBC Canada. Five of the six big banks also bumped their quarterly dividends, with TD leading the pack with a 6.25% increase. Scotiabank was the only exception as the company has historically announced dividend increases with its Q2 or Q3 results.
In an effort to diversify its financials exposure, the Fund has added to its position in Manulife (MFC) recently. MFC is a premier Canadian Lifeco with operations in Canada, the U.S. and Asia. In addition to its core insurance offerings, MFC is also a prominent player in wealth and asset management. MFC stands out among its peers with its impressive capital strength, excess capital ratios and a management team that is dedicated to disciplined expense control. MFC’s Q3 earnings per share came in well above consensus estimates, driven by strength in its Asian and Canadian divisions. The stock returned 11.7% this month and finished the month as one of the Fund’s top 10 holdings.
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