MCT June 2023 Market Commentary

  • Canada
  • MCT June 2023 Market Commentary
M-Asset

Despite the S&P 500 rising by 0.4% in May, led by a select group of large-cap growth stocks, equity returns were broadly negative this month. The Dow Jones Industrial Average, FTSE 100 Index and TSX Composite, which all have more exposure to cyclical and value sectors, generated total returns of -1.7%, -3.9% and -5% in British Pounds, respectively. May’s returns were consistent with the trend witnessed throughout the year of narrow market leadership and growth stocks outperforming value.

The outperformance that tech and consumer stocks have generated this year has been impressive but continued positive performance for the broader market is unsustainable unless market breadth improves. While we remain cognizant of lingering market risks, recent economic data supports our view that cyclical stocks should experience a catch-up trade in the near-term. Canada’s GDP grew 3.1% in Q1, much higher than consensus estimates. The strong GDP print was accompanied by several signs of broad-based economic strength, including household expenditures rising 5.7%, exports climbing 10.1% and inventories falling by C$11.7 billion.

In response to better-than-expected economic data, the Bank of Canada (BoC) raised its overnight policy rate by 25 basis points to 4.75% on 7 June. The announcement surprised most market watchers and was the first raise by the BoC since January when it signalled a conditional pause to monitor economic data. This move takes the bank’s benchmark rate to its highest level since 2001. Although the announcement disappointed many investors, it further supports our view that the Canadian economy remains on solid footing, setting the stage for cyclical stocks to outperform.

Real estate remains our biggest overweight sector relative to the benchmark as we believe it may be on the cusp of a sustained breakout. Looking back over the past five BoC rate hike cycles, REITs typically underperform the TSX leading up to the first rate hike and the six to twelve months thereafter. After twelve months, REITs start to outperform. Performance has historically been especially strong in the periods 18 months and 24 months after the first hike where REITs tend to outperform by 15 to 20% with high frequency. The BoC announced its first rate hike for the current cycle approximately 15 months ago on 3 March 2022. Put differently, we are entering a period where REITs have consistently outperformed the TSX by a significant margin.

The fund is also overweight energy relative to the benchmark. Canadian Natural Resources (CNQ) represents the fourth largest position in the Fund and is about to hit an inflection point for shareholder capital returns. CNQ is expected to start returning 100% of its free cash flow by Q1 2024 once it reaches its leverage targets, up from the current 50:50 split between shareholders and its balance sheet. The company has signaled a continued focus on share buybacks in addition to a 4.8% base dividend which has been increased for 23 consecutive years. CNQ is also expected to invest C$1 billion into strategic growth initiatives this year, leading to liquids production growth of 9% which is well above its peer group average of 2 to 3%. During the month, we also added to Suncor Energy and trimmed our exposure to Whitecap Resources. Suncor has lagged CNQ, its closest peer, by over 5% year-to-date and pays a 5.2% dividend yield. Whitecap announced in early June that it expects a slight reduction in 2023 production due to wildfires in Alberta which continue to burn across the province.

 

 

Disclaimer

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 June 2023 Market Commentary
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