Signs of Economic Strength Continue
Positive momentum from 2013 has carried over to the first quarter of 2014. As we expected, the US market has underperformed its Canadian counterpart so far this year. For the three months ended March 31, 2014, the S&P/TSX Composite Total Return Index was up 6.1% while the S&P 500 Total Return Index was up 1.8% in their respective local currencies. Health Care continues to be the best performing sector in Canada, though this is somewhat misleading given the narrow concentration of stocks in the Canadian Health Care space. Energy and Materials were the next best performers, as three years of very poor performance is starting to reverse.
Private Sector Driving the Economy Forward
Economic indicators were broadly subdued in Q1, with a great deal of the softness attributed to the harsh winter across most of North America. Signs of economic strength continue on both sides of the border, as solid housing and auto statistics combine with strengthening employment and consumer confidence. The private sector is finally driving the economy forward, an expectation we have held for a few years. On the monetary front, the US Federal Reserve continues to wind down its Quantitative Easing measures at a pace of roughly $10 billion per month. When combined with the already-implemented fiscal spending cuts, our view is the US economy is now in “self-sustaining” mode. This is all good news for Canada. The approximately 15% drop in the Canadian dollar from its highs is a net positive, however, it will take time for those effects to permeate through the broader Canadian economy. Commodity producers are the early beneficiaries and we have seen this improved sentiment reflected in share prices.
The harsh winter also had a decidedly positive effect on North American energy prices in Q1. Benchmark light oil prices hovered around $100 US and Canadian oil price differentials improved by 10%. Natural gas prices were the real standout, with some regional benchmarks hitting prices that were up to 10 times the average prices witnessed over the past few years. There is no shortage of natural gas in North America, however regional price dislocation persists due to infrastructure bottlenecks, which in turn provide investment opportunities in the Energy Infrastructure sector. US natural gas storage now sits at just over 800 Billion Cubic Feet (BCF), less than 50% of last year’s comparable level. Overall, it appears Natural Gas is past its worst point in terms of prices. It’s amazing what one cold winter will do to remind investors and consumers of our need for this vital commodity. Strength in Energy stocks was evident in all Leon Frazer portfolios, as they contributed over 50% of total returns in the first three months of 2014.
Read full Q1-2014 Quarterly Review