MCT October 2023 Market Commentary

  • Canada
  • MCT October 2023 Market Commentary
M-Asset

Equity markets continued to slide in September, driven by a sharp increase in bond yields. Although the TSX Composite declined 3.3% in its local currency, the Canadian dollar appreciated by approximately the same amount relative to the British Pound.

Bond yields have risen to sixteen-year highs but are still in-line with their long-term historical averages. The Canadian 10-year bond yield finished September at 4.03% which compares to an average yield of 3.87% over the past 30 years. We believe recent volatility is a function of markets adjusting to a more typical rate structure as we exit the extremely low interest rate environment of the past decade. We are not overly concerned by the current level of yields as equity markets have historically produced good returns in similar rate environments. Moreover, we believe that interest rate risk has largely been priced in and we see an attractive entry point for multiple sectors.

While we are comfortable with where interest rates are today, we acknowledge that further increases will continue to be a headwind for stocks. Aside from a resilient labour market, the latest batch of economic indicators have been weaker than expected. These developments match our base case of a soft landing for the Canadian economy, which should allow the Bank of Canada (BoC) to soften its hawkish stance. In fact, we believe the BoC may be done with rate hikes altogether, which is supported by the bond market pricing in just a 25% chance of a hike at its upcoming 25 October meeting.

Lower inflation is another key tenet of our stance on interest rates. In light of recent events in Israel and the expected fallout over the coming months, we expect commodity prices to trend higher through the end of the year. Fortunately, Canada possesses an abundance of natural resources and is less reliant on energy imports than the U.K. and Europe. In addition to being a top 5 global energy producer, Canada also has a clean and stable electric grid with hydroelectricity accounting for 60% of the country’s electricity supply. Moreover, Canada has the highest population growth among developed countries and can attract skilled workers to the labour pool through its points-based immigration system. These attributes have been a key differentiator for the Canadian economy, and help explain why year-over-year inflation in August was 4.0% compared to 6.7% in the U.K.

The Fund’s rate-sensitive sectors, including real estate, utilities and pipelines, have underperformed since the BoC started raising short-term borrowing rates in March 2022. Considering the growing body of evidence that suggests the pace of economic growth is moderating, we believe interest rates are peaking. Against this backdrop, we favour companies that possess defensive growth attributes – high free cash flow, low capital expenditures and strong balance sheets. Many businesses in MCT’s portfolio are currently screening as attractively priced and are well-positioned for a near-term rally. In recent days, 10-year bond yields in Canada and the U.S. have come down, thereby creating a more attractive backdrop for most companies in MCT’s portfolio.

 

 

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 October 2023 Market Commentary
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