March 31, 2024
Commentary
Monthly Update
Year-to-date to March 31, the Ninepoint Global Infrastructure Fund generated a total return of 6.77% compared to the MSCI World Core Infrastructure Index, which generated a total return of 2.44%. For the month, the Fund generated a total return of 4.10% while the Index generated a total return of 2.66%.
Ninepoint Global Infrastructure Fund - Compounded Returns¹ As of March 31, 2024 (Series F NPP356) | Inception Date: September 1, 2011
1M |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
10YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|---|
Fund |
4.1% |
6.8% |
6.8% |
13.7% |
11.2% |
7.8% |
8.1% |
6.4% |
7.5% |
MSCI World Core Infrastructure NR (CAD) |
2.7% |
2.5% |
2.5% |
13.4% |
3.3% |
4.8% |
4.3% |
8.1% |
10.4% |
With the first quarter of 2024 in the books, investors should be pleased to have participated in the best start of the year for the equity markets since 2019. In terms of some of the most widely followed indexes, the S&P Global 1200 returned +11.94%, the S&P500 returned +10.56% and the NASDAQ returned +9.31%. Although the AI investment theme has continued to power markets higher, the rally has finally shown some signs of broadening, with the equally weighted S&P 500 outperforming the market cap weighted index in March. Despite some pundits describing the environment as an investment “bubble”, after examining the balance of evidence we believe that the main drive of the recent equity performance is more fundamental in nature.
There are plenty of data points that can explain the fantastic start of the year and support our optimistic outlook over the balance of 2024. Perhaps most importantly, after two years of tightening monetary policy, inflation is clearly trending in the right direction. Based on February data (released in March), US CPI is down from 9.1% to 3.2% on a year-over-year basis and core CPI is down from 6.6% to 3.8% on a year-over-year basis. Further, PCE (the Fed’s preferred measure of inflation) is down from 7.1% to 2.5% on a year-over-year basis and core PCE is down from 5.4% to 2.8% on a year-over-year basis. Thankfully, tighter financial conditions haven’t done significant damage to the health of the jobs market and the most recent non-farm payrolls report indicated the creation of 303,000 jobs in March, while the unemployment rate was relatively benign at 3.8%.
The biggest debate in the market today remains the timing and pace of interest rate cuts in the United States.
Economic growth also continues to remain robust, with US Q4 GDP coming in at 3.4% and early estimates of Q1 GDP calling for 2.8%. This has flowed through into company specific forecasts, with investment analysts forecasting 2024 revenue growth of 5.0% and earnings growth 11.0% and 2025 revenue growth of 6.0% and earnings growth of 13.4%, according to FactSet. Admittedly, market valuations are elevated, with the S&P 500 forward P/E multiple at 20.9x (above the 10-year average of 17.7x and the 5-year average of 19.1x), led by the Information Technology sector at 28.5x. But we would point out that earnings growth in the IT sector is supportive of this valuation, since 2024 earnings are expected to grow 18.2%, implying a PEG ratio of only 1.6x compared to the overall market at 1.9x.
As investors grapple with the flood of economic and company-specific data, the biggest debate in the market today remains the timing and pace of interest rate cuts in the United States. Amazingly, the market has rapidly shifted from fears of a recession (and up to six interest rate cuts in 2024) to now thinking that growth could be too hot (and only two or three interest rate cuts will be needed in 2024). We don’t see any need to argue with the actual decision makers and the most recent FOMC dot plot (released March 20, 2024) is calling for three rate cuts of 25 bps each through 2024 and three rate cuts of 25 bps each through 2025. We also believe that Chairman Powell was subtly dovish at the most recent press conference and stayed committed to rate cuts as inflation declines to the Fed’s 2.0% target over time. This seems to imply that the Chairman is comfortable allowing inflation to trend lower over an extended but reasonable period and doesn’t feel the need to risk damaging the economy in the short run to reach his target. In the past, Powell has clearly stated that rate cuts must happen before the 2.0% target is reached, otherwise real interest rates would become too restrictive as inflation falls.
Our near-term outlook for the equity markets depends on two different scenarios. If we get fewer rate cuts than currently anticipated, mega cap growth should regain leadership and outperform but if rate cuts are in line with current expectations, the rally should continue to broaden as growth reaccelerates across most of the other sectors. Having said that, investors should always be aware that a 4% to 6% correction could happen at any time, for any reason, given where valuations are today. This would be perfectly normal and would likely offer a nice entry point for new money into the stock market. As always, we are continually searching for companies that are expected to post solid revenue, earnings and dividend growth but still trade at acceptable valuations today.
Top contributors to the year-to-date performance of the Ninepoint Global Infrastructure Fund by sector included Industrials (+345 bps), Utilities (+331 bps) and Energy (+182 bps), while top detractors by sector included Real Estate (-64 bps), Communication Services (-24 bps) and Information Technology (-19 bps) on an absolute basis.
On a relative basis, positive return contributions from the Industrials (+253 bps), Utilities (+198 bps) and Real Estate (+40 bps) sectors were offset by negative contributions from the Communication Services (-25 bps) and Information Technology (-19 bps) sectors.
We are currently overweight the Industrials, Communication Services and Real Estate sectors, while underweight the Utilities and Energy sectors. After some positive signs this past month, as we get closer to the first interest rate cut of the cycle, we expect the market rally to continue to broaden out. As the growth rate differential between the Information Technology sector and everyone else narrows through the year, we still expect a rotation into undervalued equities more aligned with our dividend-focused mandates in 2024. In the meantime, we remain focused on high quality, dividend paying infrastructure assets that have demonstrated the ability to consistently generate revenue and earnings growth through the business cycle.
We continue to believe that the clean energy transition will be one of the biggest investment themes for many years ahead. Therefore, we are comfortable having exposure to both traditional energy investments and renewable energy investments in the Ninepoint Global Infrastructure Fund given the importance of energy sustainability and security of supply around the world. Further, electricity demand is expected to accelerate dramatically, led data centers, manufacturing and transportation and we are looking to position the Fund to take advantage of this theme.
The Ninepoint Global Infrastructure Fund was concentrated in 28 positions as at March 31, 2024 with the top 10 holdings accounting for approximately 41.7% of the fund. Over the prior fiscal year, 17 out of our 28 holdings have announced a dividend increase, with an average hike of 10.1% (median hike of 2.7%). Using a total infrastructure approach, we will continue to apply a disciplined investment process, balancing valuation, growth, and yield in an effort to generate solid risk-adjusted returns.
Jeffrey Sayer, CFA
Ninepoint Partners