Thoughts on the Market: September Edition
Equity markets charged ahead in September, reaching all-time highs, thanks to a broad-based rally that saw 8 out of 10 sectors end the month higher. It was a welcome reprieve from more typical recent September market performance, as the past four Septembers have been decisively negative across North American equity markets (Figure 1).
Figure 1: September Returns were poor between 2020-2023
Source: MWG, Refinitiv Workspace
Markets are looking for further evidence of a soft landing, a scenario where employment remains strong and inflationary pressures fade. Under this scenario, The U.S. Federal Reserve could maintain a measured pace in lowering overnight funding rates, slowly taking its foot off the economic brake pedal but finding some comfort in inflation expectations l remaining subdued. The September U.S. jobs market update highlighted a slight rebound in labour conditions as evidenced by the unemployment rate falling from 4.2% to 4.1%.
We await employment data for Canada for September, which will provide one final data point for the Bank of Canada to consider in determining whether a 25 or 50 bps cut is appropriate as it looks to balance rising unemployment with a weak dollar. We have argued that Canada should be cutting more aggressively, as inflation is overstated in this country. Combined with a higher household debt load and less diversified economy, it has less ability to absorb higher interest rates.
The commodity space got a boost during the month thanks to large Chinese stimulus plans. The new measures will target the banking sector and should help stabilise a weak property market. Metals prices responded, with copper pushing up north of US$4.50/lb. While the oil price was unaffected by Chinese stimulus plans, it has re-accelerated under further Middle East unrest. It remains to be seen if major outages will occur. This comes at a time when Saudi Arabia is rumoured to be eyeing further production increases to thwart OPEC quota cheaters. With new export capacity online, Canada will benefit from any incremental strength in demand for oil.
GLOBAL EQUITY GROWTH FUND
The MWG Global Equity Growth Fund rose 2.0% in September, slightly below the 2.2% rise in its benchmark. Year-to-date, the Fund has returned 23.1% versus the benchmark return of 21.2%. The Fund’s top three performers in the month were Hudbay (+13%), Aritzia (+10%) and Meta Platforms (+10%), while Major Drilling (-11%), AstraZeneca (-11%) and Ely Lilly (-7%) were the biggest detractors.
Portfolio Managers Summary
Some key stocks broke out to decade highs during the month, including Meta Platforms, which is pulling ahead in the AI race as demonstrated by its strong monetization during the past two quarters and its open-source AI models that other enterprises are leveraging for their own needs. The stock is now more than 50% above its 2021 highs and up 6-fold from its lows of the past two years.
Manulife shares also reached their highest level since 2007, surpassing the $40 mark. We attribute its strength to its strong competitive position in North America and Asia, with credit going to CEO Roy Gori for exiting low return business lines and redeploying capital to higher profit business units. Gori was appointed CEO in 2017, but it took until 2024 for the market to reward Manulife with a higher valuation even though the successful strategy was implemented early in his tenure.
INCOME GROWTH FUND
The MWG Income Growth Fund increased 5.8% in September, above the 3.0% increase in its benchmark. The Fund is higher by 18.1% year-to-date versus the benchmark increase of 18.9%. European Residential REIT (+18%), Kingfisher (+15%) and Rio Tinto (+13%) were the top performers, while Evertz (-10%), BP (-7%) and Canadian Natural Resources (-7%) were the top detractors. The fund yield was 5.8% at month-end.
Portfolio Managers Summary
Interest rate sensitive sectors continued to outperform in September, led by REITs, utilities and financials. Several company specific catalysts drove share prices higher. For example, European Residential announced the sale of half its real estate portfolio as its parent company, CAPREIT, looks to sell its properties at a premium vs. their implied stock market value. We expect additional property sales to continue driving the share price higher. The shares have returned over 50% since late June.
We added a new position in September, buying luxury goods maker Kering, the holding company parent of famous brands such as Gucci, Yves St. Laurent, Balenciaga and Brioni, among others. We like the luxury sector as it offers global growth opportunities, high margins and inflation protection. Kering has been impacted by both a slowdown in China and the transition to a new designer at Gucci. While the company will have some near-term challenges to work through, we believe the shares trade at both trough valuation and trough margins. We expect financials results to improve through 2025, which may improve sentiment on the stock. The company has a variable dividend policy, but we expect a 4% yield going forward.
To fund the purchase of Kering, we sold our stake in Blackstone. The private equity giant’s yield fell below our 3% threshold, and we believe a stronger funding environment for private equity deals has been priced in.
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.