Equity markets finished the year on a positive note with the TSX Composite and the Fund’s benchmark each returning 5.7% (in British Pounds) and the Fund’s NAV appreciating 5.8% in December, bringing its full-year total return to -1.4%. The Santa Claus rally was fueled by bond yields continuing their descent from October highs with 10-year yields finishing the year at 3.11% in Canada and 3.54% in the U.K.
Our outlook for the economy in 2024 is for a soft landing. We expect inflation to continue trending lower and for the rate of unemployment to increase slightly from historical lows. Against this backdrop, the Bank of Canada is expected to begin easing monetary policy in the first half of the year with the futures market currently projecting approximately five rate cuts in 2024. Company earnings should also exhibit growth in 2024 after being relatively flat in 2023. Consensus expectations for the TSX Composite are for EPS growth of 7% in 2024 and 9.8% into 2025.
Assuming interest rates remain at current levels or lower, we believe dividend-paying equities are extremely well positioned. Throughout 2023, dividend stocks faced increased competition from cash alternatives and money market funds. Now, with bond yields having fallen more than 1% in two months and central banks expected to cut interest rates in the first half of 2024, dividend paying equities have become more attractive on a relative basis. For example, Canadian REITs have an average dividend yield of 5.3% which exceeds the yield of Canadian 5-year government bonds by more than 200 basis points. As a result, we expect a good portion of the capital that flowed into cash alternatives to make its way back into equities generally and dividend payers specifically in 2024.
In addition to their attractive dividend yields, Canadian REITs remain deeply discounted relative to their intrinsic values and possess significant capital appreciation potential. On average, the Canadian real estate sector trades at just 13x 2024 AFFO, a 7.2% implied cap rate and 24% below net asset value. We remain very constructive on industrial, multi-family, retail and senior living where we expect healthy growth in rental revenue serving to somewhat offset higher borrowing costs. Moreover, balance sheets remain is good shape with year-over-year average declines in leverage ratios and increases in liquidity ratios. Whether interest rates remain at current levels or decline further, REITs are well positioned to outperform over the next 12 months.
The Fund made several changes to its portfolio in December to reflect our soft landing outlook. The Fund increased its exposure to Canadian financials by adding to positions in Bank of Montreal and National Bank while also initiating a position in Power Corp. Canadian banks have underperformed the TSX over the past two years due to credit cycle concerns which stem from higher interest rates. Considering the recent decline in mortgage rates, policy changes to boost housing supply, and continued demand tailwinds from immigration, we expect a stabilization in Canadian house prices in 2024. As a result, investors have become less concerned about the credit cycle and the broader economy, causing banks to re-rate higher. Power Corp is a management and holding company focused on financial services in North America, Asia and Europe. Its core exposures include insurance, wealth management, asset management and a portfolio of alternative investment platforms. The company has a compelling valuation, a current dividend yield of approximately 5.5% and a strong track record of dividend growth throughout its 100-year history.
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