Canoe EIT Income Fund Q4 Commentary
The Fund benefitted from exposure to US equities, which outperformed their Canadian counterparts during the period (year end December 31, 2023). The S&P/TSX was up 11.8% during the period compared to the S&P500 Total Return Index (the S&P 500), which was up 26.3% (up approximately 23.3% in CAD terms).
Stock selection in the U.S. industrials sector contributed positively to the Fund’s relative returns as General Electric Co., Union Pacific Corp., and FedEx Corp. rose on an improving economic outlook. The Fund was also positively impacted by stock selection in the consumer discretionary sector as Lowe’s Cos., Inc., Restaurant Brands International Inc., and Ross Stores Inc. outperformed as they successfully adapted to the post-pandemic operating environment and consumer demand remained strong.
Relative to the Benchmark, stock selection in the US health care sector detracted from returns as the US government's funding to Medicare was less than expected and initiated steps to negotiate drug prices for the program. As a result, companies such as CVS Health Corp., Johnson & Johnson, and Elevance Health Inc. underperformed. The Fund was also negatively impacted by stock selection in the consumer staples sector, largely as a result of not owning Alimentation Couche-Tard Inc., which rallied significantly as inflationary pressures helped the company's gross fuel margins expand more than expected.
The Fund’s defensive positioning weighed on returns as investors migrated away from defensive value stocks in response to easing recession fears. Specifically, the Fund was negatively impacted by the underweighting of the information technology sector, which outperformed as easing financial conditions helped valuation multiples for the sector expand significantly. The Fund was also negatively impacted by the underweighting of Canadian financials, which rallied on rising confidence in the economic outlook for 2024.
Weakness in the US dollar relative to the Canadian dollar detracted only marginally from Fund returns as a partial currency hedge to the US dollar helped reduce currency exposure.
RECENT DEVELOPMENTS
The beginning of 2024 got off to a strong start on rising hopes for a soft landing as inflationary pressures showed continued signs of abating. In response to this easing in inflation, markets began to discount an end to the Federal Reserve’s (Fed) rate hiking cycle with interest rate cuts now priced in over the coming year. This easing in financial conditions has been generally supportive for stocks, particularly high multiple growth stocks that dominate popular market indexes. However, if inflationary pressures were to resurface and interest rates were to rise again, this could pose a risk to economic growth and to stock valuations going forward.
Geopolitical risks remain a key concern. Tensions in Europe, the Middle East, the nuclear threat from North Korea and Russia, deflationary pressures in Europe, the risk of a euro zone breakup, high debt levels in China, and the war in Ukraine are all risks that could derail the global economy.
Over the last several years, accommodative central banks around the world supported equity and bond markets via low rates. The Portfolio Manager recognizes that there has been a growing complacency toward low rates, which is reflected in above median stock valuations, and that the unwinding of monetary policy and/or the low interest rate regime could be a challenge for stock and bond markets going forward. The Portfolio Manager continues to believe higher range-bound rates and the structural shift in inflation will support a change in market leadership. As a result, stock picking, sector rotation, and asset allocation will become increasingly important to future returns.
Disclaimer
You will usually pay brokerage fees to your dealer if you purchase or sell units of the investment fund on Toronto Stock Exchange. If the units are purchased or sold on Toronto Stock Exchange, investors may pay more than the current net asset value when buying units of the investment fund and may receive less than the current net asset value when selling them.
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