Thoughts on the Market: March Edition
Three Years of Talking About Inflation
We are experiencing a bit of Deja-vu as we write this monthly commentary. The market narrative continues to be dominated by inflation and interest rates, with equities rallying on hopes of rate cuts and selling off on reports of persistent inflation. Figure 1 highlights inflation rates for various economies since 2019. We have seen progress across the board, with the days of 5%+ inflation a distant memory. However, it will be the move from 3% to 2% that may prove the most challenging, particularly due to persistent inflation in services and a rebound in oil prices.
Figure 1. Global Inflation Rates since 2019
Source: Refinitiv
Canada’s inflation rates are a lone bright spot, with a 2.8% rise in February vs. estimates of 3.1%. Regionally, provincial activity is looking a lot like 2005, with Alberta inflation accelerating on the back of net migration, strong oil prices and rising home prices. Ontario and British Columbia are feeling the hangover effects of a decade of unabashed growth in house prices. We expect higher mortgage rates to continue disproportionately impacting these two economies.
Historically. the Canadian dollar has rallied with rising oil prices, given the importance Canadian oil exports. Current oil exports of approximately 4 million barrels per day are set to increase in the next five years as the Transmountain Pipeline Expansion comes onstream in 2024, providing much needed pipeline capacity to the sector. Despite the US$15/bbl. increase in oil prices in the first quarter, the Canadian dollar has remained stubbornly low at $0.73/USD. We believe there are two factors at play. First is the fact that the U.S. itself is now a major producer of oil, and thus, the relative economic strength previously enjoyed by Canada on the oil front has been reduced. Second, the low inflation/weak unemployment dynamic is putting pressure on the Bank of Canada to cut rates ahead of the U.S. A divergent path to lower interest rates in Canada would weaken the currency further.
The equity market is on a run, with its best five-month rally since 2020 and its least volatile major rally since 2017. While the sentiment is clearly positive, we note that most of the increase in the valuation has resulted from multiple expansion, with the P/E ratio of the S&P 500 reaching 21x without clear acceleration of earnings growth yet. We are leery of paying too much for a stock and highlight that our Global Equity Growth Portfolio trades at a P/E ratio of 15.7x, below our benchmark of 17.2x. Both portfolios should generate similar earnings growth in 2024 and 2025.
GLOBAL EQUITY GROWTH FUND
The MWG Global Equity Growth Fund increased 4.7% in March versus a 3.4% return for its benchmark. Year to date, the Fund has returned 16.6% versus the benchmark return of 10.4%. The Fund’s top three performers in the month were Target (+16%), Major Drilling (+15%) and Converge Technology (+15%), while Docebo (-10%), Prudential (-4%) and Starbucks (-4%) were the biggest detractors.
We added no new names to the fund in March. We did increase our weighting in Alphabet back to 5.5%, increasing the size of our position by 21% after the shares sold off on concerns surrounding Alphabet’s competitive position in an AI world. Our research indicates the opposite, i.e., that Google’s competitive position will be strengthened by its deep resources in machine learning and databases (not to mention its full self-driving car division Waymo, which is operating in several cities in the southern U.S. to rave reviews).
INCOME GROWTH FUND
The MWG Income Growth Fund rose 3.5% in March versus a return of 3.9% for its benchmark. Year to date, the Fund has returned 4.72% versus the benchmark return of 7.95%. The Fund’s top three performers in the month were Northwest Healthcare (+19%), Target (+16%) and Canadian Natural Resources (+10%), while Cogent (-18%), BCE (-7%), and Power Corp (-2%) were the biggest detractors.
During the month, we invested in Kingfisher, a U.K. home improvement retailer with operations in eight European countries. The company will be the subject to our April mid-month research report in which Portfolio Manager Michael Hakes will outline the upside to margins in a lower rate environment.
To fund the purchase of Kingfisher, we sold our shares in Target Corp., purchased in July 2023, for a 55% gain. Target stock was approaching our target price and, importantly, the dividend yield had fallen well below our threshold for inclusion in the Fund.
This Month’s Portfolio Update is written by our Head of Research, Jamie Murray, CFA.
The purpose is to provide insight into our portfolio construction and how our research shapes our investment decisions. As always, we welcome any feedback or questions you may have on these monthly commentaries.