Mackenzie North American Equities Team*
*Formerly known as Mackenzie All Cap Value Team
- Canadian and U.S. equities delivered robust gains in the first quarter of 2017. Canadian equities, as measured by the S&P/TSX Composite Index returned 2.4% while U.S. equities, as measured by the S&P 500 Index (USD) were up 6.1%.
- What began as a euphoric environment for stocks, particularly financials and infrastructure-related companies, following the election of Donald Trump as U.S. President turned into a stagnant period for returns towards the end of the first quarter as investors began to question the ability of the new President to get key tenets of his platform legislated. Without signs that key measures of tax and banking reform can be realized and infrastructure spending authorized, the market is likely to drift as there are few other catalysts to push the market higher.
- Despite uncertainty over future policy the U.S. economy continues to grow at a moderate pace with near full employment driving wage growth and increased consumer confidence. These strong economic indicators prompted the U.S. Federal Reserve to increase rates by 25 basis points in March while messaging that more hikes are on the horizon. The Canadian economy also showed signs of improvement, due in large part to accelerating growth south of the border. The Bank of Canada signaled that a rate hike may be required in the next 12 months to slow inflation if current growth trends persist.
- During the quarter, value style investing underperformed growth investing and smaller capitalization companies outperformed larger capitalization companies in the Canadian market as tailwinds from the U.S. election continued to elevate smaller growth-oriented stocks.
Outlook & Strategy
- Canadian stocks are trading near our assessment of fair market value and we are finding it increasingly difficult to find businesses trading at a discount to our estimate of intrinsic value. We will continue to look for market dislocation opportunities where they may present themselves.
- We expect that GDP growth in Canada will trend higher, and that any potential rate increases will follow a slow trajectory upwards as the Bank of Canada stays cautiously behind the curve. The speed of both GDP growth and rate increases will depend heavily on economic growth in our largest trading partner to the south as the new U.S. administration navigates the implementation of its many pro-business election promises.
- AmGen Inc., a leading U.S. biotechnology company that we added to Mackenzie Canadian All Cap Dividend Fund in 2016, contributed positively to performance. One of only eight companies in the biotechnology sector that pays a dividend, AmGen has a mature pipeline of drugs that drive its 7% free cash flow yield. It generates this yield while maintaining a robust R&D spending program that has enabled it to add new drugs with future growth potential.
- Rogers Communications, which is held across all portfolios, was another top performing company over the quarter, and one of the best performing telecommunication companies in North America. Despite longer term weakness in cable television subscriptions, Rogers’ internet subscriptions have continued to trend higher. Internet service is a substantially higher margin business than television content distribution and internet bandwidth requirements continue to increase. Rogers also benefits from the best network infrastructure in Canada, an advantage it maintains over both its competitors and potential new entrants where capital requirements can be an impediment.
- A company that detracted from Mackenzie Canadian All Cap Dividend Fund and Mackenzie Canadian Large Cap Dividend & Growth Fund during the quarter was Peyto Exploration and Development Corp. as natural gas prices trended lower. Pipelines moving natural gas out of Alberta to market are at maximum capacity and this has created headwinds as natural gas production in the region has increased. Despite this headwind, Peyto remains the lowest cost producer of natural gas in Canada. The management team follows a disciplined growth program and consistently hedges its production forward which enables the company to smooth out its free cash flow and capital costs, and pay a dividend, while operating in what is often a volatile sector.
- As we have stated in previous commentaries, we believe that North America has entered the later stages of a bull market and as such we have taken steps to de-risk our portfolios, broadly. Part of this process includes bringing small- and mid-cap exposures to the lower end of our historical range.