The stock market continued to rally in February with the S&P 500 Index reaching new heights for a second consecutive month. While large-cap tech stocks (e.g., Nvidia) have led to the upside, market breadth has improved with other areas outside of tech also participating in the rally. The TSX Composite is now within 2% of its all-time highs, which we believe can be breached in the near future.
The market’s recent performance is impressive when considering how much bond yields have rebounded since the beginning of the year. In Canada, 10-year bond yields have risen by nearly 40 basis points and markets have gone from pricing five to three rate cuts in 2024. Fortunately, this has been driven by the resilience of the Canadian economy rather than runaway inflation. GDP growth was 1% in Q4 and Canada added 37,000 jobs in January – both above initial estimates. Meanwhile, conditions are not as favourable in other developed markets, including Japan and the U.K., which have each slipped into technical recessions. The recent move in rates has caused yield-sensitive sectors to lag the broader market, but the impacts from higher rate expectations have been much more muted compared to last year.
Although the BoC may be on pause for longer than initially expected, we continue to expect multiple rate cuts in 2024. This view is based on recent inflation data, which continues to trend lower. The CPI rose 2.9% in January from a year ago, below consensus estimates of 3.3% and within the target range for the first time since June 2023. Importantly, the BoC’s two preferred core inflation measures also decelerated, averaging 3.3% compared to the 3.6% pace expected by economists. Housing affordability improved in January and the minimum income required to purchase a home decreased across the country.
Canadian energy stocks rallied in February and were a positive contributor to Fund performance. Canadian Natural Resources (CNQ) was among the sector’s top performers, generating a total return of 9.9%. CNQ delivered strong results in 2023 highlighted by record oil sands production and the achievement of its $10 billion net debt target earlier than anticipated. The company raised its quarterly dividend by 18% in 2023 and increased it by an additional 5% in Q1 2024 – the first of several bumps we anticipate this year. CNQ continues to demonstrate best-in-class shareholder alignment and is now expected to allocate 100% of its free cash flow to shareholders since achieving its stated leverage goals.
Manulife Financial (MFC) was another big contributor to performance this month with a total return of 9.7%. In its Q4 earnings, the company reported double-digit sales growth while achieving its medium-term ROE target of 15%, underpinned by positive flows in wealth management. MFC is also committed to shareholder returns through dividend increases and share buybacks. The company raised its quarterly dividend by 10% in February, resulting in a dividend yield of c. 5%. The decision was supported by the recent disposition of its long-term care underwriting business for $13 billion. The transaction also freed up capital that can be allocated to wealth and asset management which are strategically positioned in attractive Asian end-markets including Hong Kong, Japan and Singapore. We have a positive view on MFC’s recent capital allocation decisions, and it remains one of our preferred stocks within the Canadian financials sector.
