MCT February Market Commentary

  • Canada
  • MCT February Market Commentary

Equity markets rallied in January on tempered inflation concerns. In British Pounds, the S&P 500, TSX Composite and MSCI World Index generated total returns of 4.4%, 7.1% and 5.2%, respectively. The Fund started the year on a positive note with its NAV appreciating 6.7%.

The biggest driver of the recent market rally has been mounting evidence of disinflation. In December, headline CPI growth fell to 6.3% in Canada, down from last summer’s high of 8.1%. The Bank of Canada (BoC) now projects CPI inflation to fall to 3% by the middle of 2023 and back to the 2% target in 2024. In response to this trend, Governor Tiff Macklem announced at its most recent meeting that the BoC expects to pause rate hikes and weigh the impact of its rapid tightening. As previously indicated, we agreed with the BoC’s decision to front-load rate increases in 2022 and welcome this dovish tone. Since inflation remains higher outside of Canada, we expect other central banks, including the Bank of England and US Federal Reserve, to maintain their hawkish stance for a few more months before shifting to a similar policy.

Although our base case is for inflation to continue tracking lower, lessons from the 1970s taught us to remain wary of claiming victory against inflation too soon. In our view, there are two critical factors to monitor before we can feel confident that inflation has been tamed. First, the labour market has proven to be extremely resilient and has introduced an element of stickiness to inflation. Canada added 150,000 jobs in January (compared to expectations of 15,000) and the unemployment rate remains near all-time lows. The second factor is China’s resurgence from lockdowns, which has resulted in higher forecasted demand this year and a corresponding increase in commodity prices.

The Fund is uniquely positioned to benefit from China’s reopening due its potential impact on energy prices. China’s perpetual lockdowns are estimated to have impacted global oil demand by up to one million barrels per day. With no signs of returning to the draconian policies of previous years, we expect China’s energy demand to surpass pre-pandemic levels. Moreover, 2022 marked the largest release of the United States’ Strategic Petroleum Reserve in history — a process that is now largely complete. As a result, we expect a strong commodity price environment this year with these two macro headwinds removed. Most energy producers are nearing completion of their de-leveraging programs and will be able to channel additional free cash flow to shareholders in the form of dividends and share buybacks. The Fund is slightly overweight energy producers and pipelines relative to the benchmark.

REITs had an excellent start to 2023 with the Canadian real estate sector returning 10.7%. The industrial real estate market remains extremely hot in Canada, highlighted by CBRE’s quarterly industrial markets stats report. In Q4’22, national industrial rents grew by 31% year-over-year and 6% quarter-over-quarter. Leasing volumes came in 27% higher than their five-year average while average sale prices increased 29% compared to last year. Our positions in industrial REITs performed particularly well with Dream Industrial REIT and Granite REIT returning 20.3% and 18.3%, respectively. Even though both companies rallied more than 18% in January, they still trade at a discount to their respective NAVs with private market valuations much higher than those implied by current share prices.

Have Questions?

Whether you have specific investment inquiries or general questions about Middlefield, our team would be glad to help.

Contact Us



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

  • Canada
  • MCT February Market Commentary
Subscribe to Our Insights!
Flyout Form
Subscribe for MCT Updates
Flyout Form UK