Equity markets rebounded in May with Technology and Communication Services leading the rally. Energy and Materials took a breather this month following several months of solid performance. The Fund’s NAV generated a total return of 2.7%, in-line with the Benchmark, while its share price appreciated by 7.5%.
For the first time in more than four years, the Bank of Canada (BoC) has announced a cut to its overnight policy rate. The June 5th announcement caused interest-sensitive sectors such as Real Estate and Utilities to rally on the news in what could be the early stages of a turn in sentiment. While the BoC and the Fed typically have similar policy stances, there is historical precedent for the two central banks to diverge. Since 2005, the gap between the overnight rates at the BoC and the Fed has widened to as much as 100 basis points which represents another 25 basis from the current spread. Although expectations for the first Fed cut are starting to move forward again, we believe the BoC could make one more 25 basis point cut before the Fed makes its first move.
Canadian inflation data for the month of April is what gave the BoC the all-clear to start cutting rates. Canada’s annual core inflation rate eased for the fourth consecutive month in April to an average yearly pace of 2.7%. Excluding shelter costs, the consumer price index rose just 1.2% year-over-year which is well-within the BoC’s zone of comfort. GDP growth for Q1 also came in at a weaker-then-expected pace of 1.7% which gave BoC additional cover for the decision. We acknowledge that economic growth in Canada is slowing but do not foresee a recession in the near-term. This is supported by consumer confidence which reached a two-year high in May according to the Bloomberg Nanos Canadian Consumer Confidence Index. This data point reflects growing optimism among Canadians about their personal finances, job security and economic and real estate prospects. Together, we feel these data points provide a supportive macro backdrop for Canadian equities.
We maintain a bullish stance on Canadian REITs and are overweight the sector. The Fund’s core exposures within Real Estate include apartments, industrial, grocery-anchored retail and seniors housing. REITs in these areas still trade at persistently high discounts to NAV even though they enjoy positive supply/demand dynamics, solid balance sheets and increasing cash flows. As mentioned earlier, the recent rate cut from the Bank of Canada may serve as the long-awaited catalyst that causes REIT share prices to gravitate closer to their NAVs. As we witnessed in Q4 of last year, when 10-year bond yields fell by 100 basis points and Canadian REITs rallied by 20%, sentiment can shift quickly, and we are optimistic on the sector as we enter a period of easing monetary policy.
We were recently in London and hosted an investor lunch with Greg Ebel, the CEO of Enbridge (ENB). Greg reiterated the ability for natural gas to provide clean, affordable and secure energy to the world. ENB possesses a strategically located natural gas infrastructure system throughout North America, positioned to benefit from the rise of data centers seeking reliable power sources. The company was also bullish on the long-term outlook for gas infrastructure assets, as evidenced by its September 2023 announcement to acquire three U.S. based gas utilities to create the largest natural gas utility franchise in North America. On June 3rd, ENB showed progress on the transaction by announcing the closing of Utah-based Questar Gas. These acquisitions reinforce ENB’s commitment to delivering stable and predictable cash flows, supporting their long-term dividend growth strategy. ENB is the second largest position in the Fund and is well-positioned for the future through its diversified platform of natural gas, liquids and renewable power assets.
