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With the reopening trade in full swing, energy continued its leadership from the fourth quarter and was an outperformer in the first quarter as well. The portfolio is currently overweight the energy sector but has taken some profits recently as the stocks are overbought in the short term. As mentioned in previous letters, we continue to monitor the rig count as an early indication of additional supply coming on, which may cut short the rally in these stocks. To date, the increase in the rig count has been modest.
Base metal stocks also continued their rise with the strength of the underlying commodities and the tight supply being experienced by the smelters. With respect to copper, we continue to believe the under spending in the sector over the past decade bodes well for the red metal in the medium and long term. However, given the sector’s rise, we would not be surprised if the stocks took a pause and consolidated before moving higher.
As mentioned earlier, the portfolio was largely in line with the small cap index given its overweight of both energy and base metals. Despite the significant selling we had done in technology stocks earlier in the year, the technology stocks were a drag on the portfolio. The lack of defensive or financials also hampered performance.
OUTLOOK
What next? We are still extremely bullish on Canadian small cap stocks. Despite the strong returns of last year and first quarter, the path forward continues to show growth as we exit the pandemic. Globally, governments around the world continue to keep fiscal stimulus and easy monetary policies and with a goal to allow inflation to creep up to a higher level than previously acceptable (+2.5%). This backdrop is very bullish for Canadian equities and bodes extremely well for the small cap universe with its concentration in cyclical stocks. Also of note, is that foreign investors have begun adding to Canadian equities, which also should help propel our indices higher.
As always, it is never a straight line forward, and we expect the market will need to digest some of the exceptional gains in the last year. Not only that, but there are many risks still facing the stock market as the COVID pandemic enters its third wave in Canada from the fast-spreading variants. Ultimately, we will prevail, but the markets may go through some further volatility as we move forward with vaccinations and the eventually reopening of the global economies.
I look forward to hearing from you if there are and questions or comments you may have. Stay Healthy and Safe!