Middlefield Market Commentary
Macro Update
by Dean Orrico President & CEO?and Rob Lauzon, Managing Director & CIO
The year 2024 proved to be an impressive one for equity investors, marked by substantial gains that have laid a strong foundation for continued growth in 2025. The S&P 500 and TSX Composite delivered total returns of 25% and 22%, respectively, showcasing the strength and resilience of the North American markets. This superb performance was broad-based, with 10 out of 11 S&P 500 sectors posting positive returns. Building upon similar performance in 2023, the US market has now returned over 50%, marking the best two-year gain since the notable period in 1997/1998.??
We see potential for sustained market momentum in North American equity markets throughout 2025. Our positive stance is underpinned by expectations of continued earnings growth, a healthy labour market and an economy benefiting from productivity gains. The incoming Trump Administration is expected to create a more pro-business environment as reduced regulatory burdens and potential tax cuts could boost corporate profits and stimulate economic growth. This is further supported by key investment themes that are secular in nature, including artificial intelligence, e-commerce and aging demographics. These trends are expected to drive long-term growth across various sectors, providing a fertile landscape for investment opportunities. Another crucial area to watch in 2025 is the anticipated rebound in capital markets as deregulation advances while rate volatility is expected to decrease. This resurgence should greatly benefit companies across the financials, infrastructure, and real estate asset classes, creating a ripple effect of growth throughout the economy.?
Real Estate
by Dean Orrico, President & CEO
Despite a sharp rally during the third quarter, the real estate sector lagged the broader market in 2024. Canadian REITs generated a total return of -1.9% while the US real estate sector returned 5.2%. Our Real Estate strategies again outperformed in a challenging interest rate environment, with MREL and Real Estate Dividend Class delivering total returns of 7% and 6.6%, respectively. Billions of dollars have migrated to GICs over the past several years – a trend we expect to reverse as interest rates fall and income-focused investors seek higher yield alternatives.??
In Canada, we expect the sector to generate earnings growth of approximately 7% in 2025, up from a 4% growth rate in 2024. With a federal election in 2025 likely to result in a Conservative majority, we believe a more business-friendly political environment could act as a catalyst for REIT valuations. Lower borrowing costs should also act as a tailwind for earnings over the next two years, particularly in Canada where the 5-Year bond yield sits at 3%. We recently met with over 20 CEOs at a Canadian REIT conference in early January and have confirmed that the fundamentals across most real estate sectors remain extremely solid. Together with the prospect of above-average earnings growth, attractive dividend yields and the potential for multiple expansion, we believe the sector should deliver double-digit returns in 2025.?
Healthcare
by Rob Moffat, CFA, Portfolio Manger
Healthcare lagged the S&P 500 for a second consecutive year in 2024. All of the sector’s underperformance came during the final four months of the year, starting in September with a market rotation away from defensive sectors following better-than-expected economic data. The sell-off was exacerbated in November and December with Trump’s unorthodox picks to run various public health agencies and the startling assassination of UnitedHealthcare’s CEO. Despite the challenging backdrop, our healthcare funds performed well on a relative basis with Middlefield Healthcare Dividend ETF (TSX:MHCD) returning 12.8% in 2024 versus the Benchmark (MSCI World Health Care Index) return of 1.6%.?
Entering 2025, healthcare is trading at a five-turn P/E multiple discount to the S&P 500 as markets price in worst-case scenarios. This discount is below past periods of policy uncertainty and compares to an average 6% premium relative to the Index over the past 35 years. Fundamentals do not justify the current valuation discount, with healthcare projected to generate above 20% EPS growth next year – well above the market growth rate of 13%. The sector currently offers robust growth at a reasonable price, making it one of the most attractive sectors in the market.???
Infrastructure
By Rob Lauzon, Managing Director & CIO
North American midstream and utility companies delivered total returns exceeding 20% in 2024, driven by strong company fundamentals, robust demand, and a shifting geopolitical landscape emphasizing energy security. This outperformance is expected to continue into 2025 as the AI buildout accelerates, driving significant energy demand, while anticipated regulatory support fosters increased M&A activity within these sectors. Seasonality, including colder weather at the start of the year, has led to spikes in natural gas prices, further benefiting midstreamers with efficient marketing subsidiaries.??
The announcement of the world’s largest AI data center park proposed in Alberta marks a significant step in strengthening the country’s position as a hub for technology and energy innovation. This development aligns with the broader theme of energy independence, as Canada leverages its vast natural resources to meet the growing power demands of hyperscalers and Big Tech players. Alberta’s abundant natural gas reserves and robust energy infrastructure position Canadian E&P companies, such as Tourmaline and ARC Resources, to supply scalable, reliable, and cost-effective energy solutions to power-intensive operations. Additionally, pipeline operators like Enbridge and TC Energy ensure seamless transportation of natural gas, while utility companies such as Capital Power and TransAlta integrate renewable energy with their core gas-fired assets to create a balanced energy mix. For Big Tech, the Alberta data center park offers the dual advantages of accessing clean, affordable energy and capitalizing on Canada’s commitment to grid stability and innovation, ensuring seamless operations for AI, cloud computing, and data-driven technologies. This partnership between energy and technology sectors reinforces Canada’s role as a leader in sustainable growth, energy security, and digital transformation.?
Technology & Communications
By Shane Obata, CFA, MFin, Portfolio Manger
The current investment landscape is marked by a dynamic interplay of emerging trends and evolving market sentiment, particularly within the technology sector. A significant shift is anticipated as investors are expected to gradually move away from semiconductor stocks and increasingly favor software companies. This transition will largely hinge on the ability of software providers to showcase a substantial increase in revenues derived from artificial intelligence (AI) applications, alongside a compelling demonstration of practical AI use cases across various industries. The success of this pivot will rely heavily on tangible evidence that software companies can effectively harness the power of AI to deliver innovative solutions and drive business growth. The future of software is undeniable, but the coming years will be the time to show the potential power of this sector.?
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The ability of software to automate processes, optimize workflows, and provide valuable insights will make it an indispensable tool for organizations seeking to gain a competitive edge in the digital age. Within the software domain, cybersecurity is expected to remain one of the most resilient and important themes. As cyber threats continue to grow in sophistication and frequency, the demand for robust cybersecurity solutions will only intensify. Companies that specialize in providing cutting-edge cybersecurity technologies and services are well-positioned to benefit from this sustained demand, making them attractive investment prospects.?
Resources
By Dennis da Silva, Senior Portfolio Manager
The price of gold traded in a narrow range through December but still managed to generate its biggest annual gain since 2010 of over 27%, beating the S&P 500. Gold averaged almost US$2,400/oz in 2024, which marks a fifth consecutive year of record annual gold prices. Over the past 25 years when gold’s annual gain has surpassed 20%, it has increased 12% on average in the following year. China’s central bank added to its gold reserves in November, ending a six-month pause in purchases. We expect China to continue to be a buyer of gold and a persistent seller of US treasuries, with tensions likely to increase further under the incoming Trump presidency. On the corporate front, Agnico Eagle announced a friendly proposal to acquire one of our portfolio companies, O3 Mining for $1.67/share, representing a 58% premium to its closing price. Strategically, we view the take-over by Agnico as logical, as the company operates the Canadian Malartic complex adjacent to O3’s Marban development stage project.??
The announcement by the outgoing Biden administration of new energy sanctions on Russia and the expectation of return of heightened foreign policy measures on Iran is charging an advance in oil prices.? The key question is whether the Trump Administration will look to reverse this move when he returns to the White House or keep the Russian sanctions on to exert leverage on Putin when negotiating a conclusion to the war in Ukraine. Separately, we expect Trump to reverse Biden’s ban on offshore drilling and the LNG permitting pause. We remain of the view that oil should remain above the $70 per barrel level during 2025, a price when combined with a weak loonie, results in very attractive return metrics for Canadian crude producers.???
About Middlefield:
Founded in 1979, Middlefield is a specialist and independent equity income manager headquartered in Toronto, Canada. Middlefield’s actively managed, award-winning funds are designed to be “investments that work for you” by distributing consistent and high levels of income through various market cycles. Middlefield’s funds span a number of market sectors including real estate, healthcare, innovation, sustainability, infrastructure and energy. Investors can access these strategies in a variety of product types including ETFs, Mutual Funds, Closed-End Funds, Split-Share Funds and Flow-through LPs. To learn more, visit www.middlefield.com.
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