August was a solid month for dividend-paying Canadian equities. In British Pounds, the Fund’s NAV generated a total return of 3.3% which compares to the Benchmark and TSX Composite Index returns of 1.6% and 1.3%, respectively. Real Estate, which represents a meaningful overweight position for the Fund, was the biggest contributor to outperformance in August.
On 4 September, the Bank of Canada (BoC) implemented its third consecutive interest rate cut, reducing the benchmark rate to 4.25%. The BoC is expected to enact additional rate cuts over the next year with the swap market implying a Policy rate of 2.7% by next summer. The U.S. Federal Reserve is also expected to start cutting rates at its next meeting on 18 September, helping to keep monetary policies in sync between the two closely connected economies. As inflation slows and economic growth steadies, we expect easing monetary policy to act as a prevailing tailwind for Canadian dividend-paying equities.
The emergence of AI and the spike in borrowing rates caused capital to flow away from Canada’s core sectors over the past two years. It is estimated that approximately $200 to $300 billion of capital that typically invests in dividend-paying stocks left the equity market for cash and cash-like alternatives over this period. However, on 11 July, when U.S. CPI came in softer-than-expected, market breadth began to increase, causing equity leadership to transition to a new cohort of stocks. This has benefited Canadian equities which have outperformed the U.S. by more than 5% so far in H2’24. In fact, we expect capital will continue to flood back into Canada’s high yielding sectors such as Real Estate, Utilities and Financials over the coming months as investors seek levels of income no longer available in the money markets.
REITs extended their solid performance into August, continuing the upward trend that began in late June. We’ve maintained for several months that the fundamentals across the real estate sector (ex-office) are as good as we’ve seen in years. Canadian retail REITs, which returned 6.6% in August, offer an excellent of example of these dynamics. The group is benefiting from a supply-constrained environment, as highlighted in the CBRE H1’2024 Retail Rent Survey. New construction of retail space is at historic lows at a time of record population growth in Canada. The scarcity of space has resulted in retail REITs reporting some of the best metrics we’ve seen in years. Average occupancy reached a decade high of 97.5% in Q2, and leasing uplifts came in at +9.8%, well above the five-year average of +5.6%. These figures underscore the sector’s ability to capitalize on very favorable market conditions. The Fund has exposure to several necessity-based retail REITs including Choice Properties, RioCan, Crombie and First Capital.
Canadian pipeline companies have also recently benefited from falling rates. In August, Enbridge and TC Energy, two key holdings, posted total returns of 6.8% and 6.5%, respectively. Both companies, with extensive energy infrastructure networks across North America, are well-positioned to capitalize on rising energy production. Adding to optimism for the sector is the recent progress at LNG Canada, the largest private infrastructure project in Canadian history. The facility is set to receive its first natural gas deliveries in September and is on track to begin exporting LNG by mid-2025. We expect the project to create new growth opportunities for Canadian pipeline companies and attract new international investment over the coming years.
