MCT’s momentum continued in September with the Fund’s NAV appreciating 2.9% in British Pounds. Year-to-date, MCT’s NAV has generated a total return of 12.1%, outperforming the Benchmark and the TSX Composite Index returns of 6.9% and 9.2%, respectively.
There were several important developments in global markets this month but the most impactful came from policy easing. The Bank of Canada announced its third consecutive 25 basis point rate cut in early September, bringing the Overnight Policy rate to 4.25%. In the U.S., the FOMC reduced the fed funds target rate by 50 basis points, above the 25 basis point cut anticipated by consensus. Meanwhile, the Bank of England kept rates unchanged at 5% as it awaits further signs that inflationary pressures have subsided.
Another form of policy easing came from China this month in what is being referred to as its “stimulus bazooka.” The Chinese government announced bold measures in both monetary and fiscal policy to stem deflation and meet the country’s annual growth target of 5%. Monetary measures include cutting the reserve requirement ratio by 0.5%, reducing short-term interest rates, and lowering mortgage rates for existing loans. On the fiscal front, the Ministry of Finance is planning to issue special sovereign bonds to stimulate consumption and could inject $140 billion into the country’s largest state banks. The announcements are aimed at accelerating lending and bolstering a declining property market – outcomes that could have broad implications for the global economy.
Canada is positioned to benefit from China’s stimulus bazooka. The TSX Composite returned 3.2% in September (local currency) and closed at an all-time high on October 1st. Canadian stocks, particularly in the resource sectors, responded positively to the announcements from China in late September, before tensions between Iran and Israel caused oil prices to spike even further in early October. China is a major consumer of other Canadian exports as well, including lumber, precious metals and agricultural products. Canadian exporters should be beneficiaries of renewed demand tailwinds if the Chinese government’s stimulus program has its desired effects. The TSX is trading at just 15x forward earnings and Canadian equities currently offer compelling growth at a reasonable price.
MCT’s overweight exposure to Canadian REITs continued to contribute positively to performance this month. The TSX real estate sector returned 5.6% in September and is now up nearly 25% since late June. Despite the impressive rally, we maintain the view that REIT fundamentals are on solid footing and there is additional upside embedded in current unit prices. Against a backdrop of rising interest rates, many companies and analysts lowered their net asset value (NAV) estimates over the past two years. This was a prudent decision to reflect higher capitalization rates across the real estate sector. With interest rates now declining, a trend we expect to continue for several more quarters, we believe there is a high likelihood that NAVs will start to increase over the next twelve months. On paper, REITs are still trading at a c.10% discount to NAV on average, before making any significant adjustments to current NAV estimates. In addition to the price-to-NAV discount narrowing further, we expect NAV growth to act as an additional tailwind for the sector going forward.
