Middlefield Canadian Income sees room for optimism – Middlefield Canadian Income (MCT) outperformed its benchmark by 0.4% in the financial year to December 31, 2018. The fund, which also invests in the US to take advantage of certain opportunities that may not be readily available in Canada, focuses on high-yielding sectors such as real estate and financials. MCT believe that the broad market sell-off in Q418 was mainly related to equity valuation and as such they continue to see room for optimism in their target markets, including in energy where they hold a number of companies.
MCT’s investment management report section accompanying the results announcement had this to say on the fund’s performance in 2018 and its outlook for the current year: “The Bank of Canada expects economic growth of 1.7% in 2019 which is attractive relative to other developed nations. Canadian unemployment is at multi-decade low of 5.8% and wage growth has been positive in select provinces. The residential real estate market is undergoing a soft landing, which alleviates recent fears of a major housing correction. The resolution of North American trade agreement sand recovering commodity prices provide broad-based economic stability.
After a 40% sell-off in oil prices at the end of 2018,there is reason for optimism within the Canadian energy sector and pipelines. Realized pricing for Canadian oil producers has improved significantly due to narrowing differentials and companies have streamlined their operations in the context of a challenging macro environment.
Canadian real estate investment trusts offer growing levels of income and various sub-groups within the sector possess compelling fundamentals. Specifically, unprecedented levels of immigration into Canada and lagging household formation among millennials has led to a surge in rental demand and low vacancy rates in the multi-unit/apartment sector. Supply is expected to lag demand in major urban centers for several years, which should drive apartment rental rates higher. We are equally constructive on industrial real estate, which is poised to outperform as a result of the secular growth in E-Commerce and the corresponding demand for warehouse space to accommodate logistics and distribution services.
Looking forward, we are positive on North American equities in light of a dovish tone from central banks, recovering commodity prices and stable fundamental data such as employment and inflation rates. The market correction experienced in Q4 2018, in our view, was a valuation correction rather than a fundamental signal of recession. We expect GDP growth in Canada of approximately 1.5%, while growth in the U.S. is expected to be approximately 2.5% in 2019. However, due to the slowdown in economic activity globally over recent months and the corresponding decrease in interest rates, the Fund’s portfolio is tilted more defensively to pipelines, REITs and utilities.”
MCT: Middlefield Canadian Income sees room for optimism