After a strong start to the year, North American equity markets gave back some of their gains in February. Year-to-date, the TSX Composite has outperformed the S&P 500 by 1.1%. We maintain our constructive view on Canadian equities and have taken the portfolio’s allocation to Canada up to 100%.
The recent failure of both Silicon Valley Bank and Signature Bank have caused interest rates to come down and created significant uncertainty about the future path of rates. Notwithstanding this evolving situation and the impact it may have on inflation and economic activity, interest rates continue to remain higher in the US than Canada. After several months of declining inflation data, January’s CPI report in the US showed that inflation rose 0.5% month-over-month and 6.4% compared to a year ago. The US added 517,000 jobs in January while the unemployment rate reached 3.4% — the lowest level since 1969. Higher-than-expected inflation indicators continue to support a “higher-for-longer” interest rate environment in the US for the time being. Meanwhile, the Bank of Canada officially became the first major central bank to end its tightening cycle on 8 March when it announced it would hold its key overnight rate at 4.5%. Canada’s annual inflation rate fell to 5.9% in January, below expectations of 6.1% and 6.3% in the previous month.
The Fund sold Broadcom in February, its only US holding. Broadcom has been a positive contributor to the Fund’s performance since it was added in 2020 but we do not see as much upside in the stock at current levels. On a forward price-to-earnings multiple, the stock is above its long-term historical average despite an increasingly challenging backdrop for the tech sector. Broadcom is a name we may consider re-adding on a pullback given its growing end-markets, strong free cash flow generation and attractive dividend yield.
Enbridge hosted its 2023 Investor Day in February, reaffirming our bullish view on the company. Its conventional business segments, which are benefitting from North America’s booming LNG industry, are complemented by a number of low carbon capital projects, including over $1 billion annually to its renewable power business. The company stressed its commitment to maintaining a strong balance sheet and a low-risk business model with growth from contracted projects fueling growing dividends. The update reinforced our expectation that over the next several years, Enbridge should deliver double-digit returns annually, driven by a 6.5% dividend yield and 4% to 6% EPS/EBITDA growth.
Whitecap Resources is another portfolio holding that provided a positive update this month. The company beat cash flow per share expectations during the fourth quarter and is on track to increase shareholder returns later this year. Whitecap’s net debt is expected to decline from $1.5 billion to $1 billion by the end of 2023. When net debt reaches $1.3 billion, expected in mid-2023, the company plans to increase its dividend by 26% and to allocate 75% of free cash flow to shareholder returns. With a current dividend yield of nearly 6% and high visibility into future growth, Whitecap remains a core name in the Fund’s portfolio and represents a top 5 position.
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.
