NexC December Commentary

Market Commentary

December saw Bernanke’s last Fed meeting on December 18th that unveiled the tapering program. The market reacted positively to the slow pace of tapering, as U.S. equities rallied into the holidays with the DJIA and S&P hitting new highs. USD/CAD continued its upward trajectory, breaching the 1.07 level by month end. Precious metals sold off again this month. Gold was down approximately 3.75%, and silver was down almost 2.75%, with gold equities performing poorly as investors unwound their holdings. On the other hand, base metals performed well in December as copper was up 1.78%. Looking ahead to 2014, there is improving economic data, along with the likelihood of a U.S. budget deal early in the year. This should point towards higher equity markets, strengthening USD versus CAD and weaker commodity markets. We expect commodities to remain pressured until we see growth signals from China or higher inflation forecasts.

Fund Commentary

The Fund was well positioned for the rally in the U.S. equities market. All sectors delivered positive returns after Bernanke’s comments about gradual tapering. The best performing sectors were information technology, industrials and energy. The worst performing sectors were telecom, utilities and financials.

The best performing stocks were Husky Energy, Campbell Soup and Pembina Pipelines, and the worst performing stocks were TransAlta, Bank of Montreal and Telus Corp. Husky Energy was up 12.37% in December, benefiting from good production guidance for their oil sands business, a surge in refineries as WTI/Brent spreads widened in December, and record natural gas prices. Campbell Soup continues to do well on expectations that it could follow in Heinz’s footsteps as a potential M&A target for Warren Buffet. The stock was up 11.75% over the period, and is up 25% for the year. Pembina Pipelines reached binding commercial agreements to proceed with a $2B pipeline expansion from Fox Creek, Alberta to Edmonton, Alberta. The pipeline will add up to 500,000 barrels per day in capacity, increasing their combined capacity more than expected, which buoyed the stock 11.29%.

TransAlta underperformed after the stock missed earnings in Q3, and issued another $400MM of debt at the end of November. The portfolio has held TransAlta since inception, and is up on the position on a total return basis even as the stock price has recently declined. Bank of Montreal was down post Q3 earnings as they were only slightly better than estimates. The stock declined 3.8% even as the company announced a 15 million share buyback and an increase in their dividend to stave off selling. Telus received approval for their Public Mobile acquisition at the end of November, but sold off in December as rumours about Wind Mobile bidding for Mobilicity scuttled the possibility of a further opportunity for Telus. The Canadian government also indicated that incumbents will not be allowed to acquire spectrum licences via acquisitions and had rejected Telus’ bid for Mobilicity, which had been up for grabs since September. The stock was down 1.7% in December.

The portfolio is holding 28 Canadian equities and 12 U.S. equities with a currency hedge. We continued the option overwriting program on 11 U.S. names and 7 Canadian names. Currently the fund is not using leverage.

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