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Written by the Mackenzie Global Equity & Income Team
Market Outlook
As we exited the third quarter, the focal concerns among investors remain unchanged from when we entered the quarter. Interest rates and inflation continue to dominate discussions, underscored by the Federal Reserve’s recent hint towards a ‘higher for longer’ stance on interest rates – a noteworthy disclosure given the current 5% yield on 2-year US treasuries. On the global stage, geopolitical tensions persist with the conflict in Ukraine nearing its second anniversary in February, unresolved discord between the US and China despite some high-level attempts to ease tension, and the greatly distressing confrontations in the Gaza Strip and Israel exacerbating the already strained environment in the Middle East.
Amid this backdrop, almost all sectors had negative returns this quarter, with Energy standing out as the only area with double digit returns (+10.9% in USD). Communication Services (+0.5%) and Financials (-0.7%) also outperformed the overall market. Utilities and Real Estate were the worst performing sectors, given their perceived roles as “bond proxies” in light of the Fed’s revised inflation outlook. The stylistic shift that commenced towards the end of Q2 carried through Q3, propelling slower growing, statistically cheap stocks ahead of their faster-growing, pricier counterparts – and was especially pronounced among non-US companies. Driving this shift were steadier employment figures globally and a deceleration in the inflationary data improvement we saw earlier in the year. As the prospects for a quick slowdown in inflation waned, the long end of the bond market rose and reduced the degree to which yield curves remained inverted. The market construed this “inversion reduction” as a sign that the likelihood for a recession had been lowered, to which our retort to this, as usual, is…maybe. Our positioning has largely stayed unchanged over the year, with the portfolio behaving as anticipated amidst a challenging market environment.
Commodity stocks, particularly Energy, were a bright spot over the quarter, as most of our direct holdings in this area (Chevron, Glencore, Shell, ConocoPhillips and Schlumberger) were up double-digits. After a period of weakness YTD, global oil prices increased significantly since the prior quarter, as both Saudi Arabia and Russia extended their oil production cuts to the end of 2023, leading to a supply deficit. Furthermore, the intent to refill the Strategic Petroleum Reserve by the US government should continue to be supportive of demand. Indeed, U.S. crude oil prices topped $90 a barrel for the first time since November 2022, despite concerns over a decelerating global economy. As a reminder, we began to rebuild our position in the Resource sector in early 2021 (after fortuitously selling out of Energy at the onset of the Covid pandemic in February 2020!) due primarily to what we saw as a structural supply imbalance driven by underinvestment related to ESG pressures and the downcycle in commodity prices. Simply put, we believed that the demise of oil was overstated and demand for “green” commodities like copper was underappreciated. Our view was that resource stocks would increasingly be valued for robust cash flow generation, strong dividends, shareholder return focus, and as a hedge against inflation. That view remains and we continue to hold a diversified basket of leaders in the industry and remain constructive on the longer-term outlook, especially as managements remain capital disciplined and focused on value creation.
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This document may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of November 1, 2023. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.
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