fundtruffle

Canadian election result puts pressure on energy sector

David Stevenson, 23/10/2019

Canadian Prime Minister Justin Trudeau clung on to power after yesterday’s Canadian election result confirmed his victory although he now has to galvanise support from other parties as his Liberal party can only form a minority government.

Dean Orrico, fund manager of the Middlefield Canadian Income Trust, told Fundeye that Mr Trudeau was able to ‘sidestep some of their [Liberal Party] mishaps over the last year’, one of the most notorious being the appearance of  the ‘blackface’ photos.

However, with the Liberals probably needing support from the left leaning NDP Party, this may put pressure on the country’s energy stocks, which make up the largest sector of the Toronto exchange. In fact, the market was up following the election result but energy stocks took a hit.

Mr Orrico said, “It’s [energy sector] no worse than we have it right now, been in trouble for the last four to five years. The fact that no new pipelines have been built is a failure of the Federal government.”

This is an important point for Mr Orrico as pipelines are the fund’s third largest sector weighting. Now Mr Trudeau may have to work with NDP, it’s unlikely that the Trans Mountain pipeline will be finished as the project had already caused controversy with vocal opposition to its extension by certain indigenous peoples.

However, Mr Orrico is not particularly worried about the future of pipeline sector, advising ‘continue to own companies that have them as no new ones are getting built’. He’s more concerned with energy producers but his fund is relatively underweight in that sector.

Given the amount of volatility in the markets which Mr Orrico said is going to be ‘the name of the game’ into next year, the Canadian market seems more insulated from potential pitfalls than other developed markets. The country has one of the lowest debt to GDP ratios across major markets and unlike many central banks has not had to cut interest rates.

While the trust is trading on a double digit discount, around 15 percent, this has narrowed although still represents a good entry point. When asked if the company was going to engage in any share buy-backs to close the discount, Mr Orrico said the board doesn’t think share buy-backs have any sustained benefit, ‘we want to continue to grow the trust as opposed to making it smaller through buy backs’.

For equity investors looking for relative safe havens in a market dogged by US-China trade disputes and Brexit concerns, Canada is certainly worth a consideration. Furthermore, for those seeking a decent level of income, Middlefield’s dividend yield is 5.1 percent, with top holdings in real estate and quality financials.

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