Stan Wong, director and portfolio manager at Scotia Wealth Management
Focus: North American large caps and ETFs
As we await clearer signs of springtime weather global equity markets have also remained uncertain, with volatility levels elevated. U.S.-China trade tensions continue to cause investor anxiety, with the prospects of a possible trade war between the two countries sparking big swings across global markets. Indeed, heightened trade protectionism represents a serious risk to the global economy and financial markets. Earlier this week, the International Monetary Fund (IMF) urged governments to “steer clear of protectionism in all its forms.” The IMF further declared that “there is new urgency because uncertainties have significantly increased – from trade tensions, to rising fiscal and financial risks, to more uncertain geopolitics.” Regardless, the IMF indicated that it remains optimistic about the global economy through 2019, but that momentum in the world’s economic growth will eventually slow as fiscal stimulus in the U.S. and China diminishes and as global central banks normalize monetary policy after many years of unprecedented easing.
It’s very possible that while the U.S. and China are publicly engaged in a posturing of antagonistic trade threats, quiet negotiations and compromise are happening in the background. It’s widely viewed that U.S. trade actions targeting China are more of a tactic to provoke negotiations than the start of an intentional trade war. Here in North America recent, more productive negotiations may lead to an agreement in principle on NAFTA in the coming weeks. The U.S. push to settle the NAFTA negotiations sooner than previously thought is likely an attempt by President Trump to appease trade-reliant states ahead of upcoming mid-term elections. Nevertheless, should we see an eventual easing of global trade concerns, global equity markets should rally upwards. With earnings reporting season now upon us, an anticipated set of strong first-quarter corporate earnings results (and guidance) could further bolster stocks.
Notwithstanding apparent and potential headwinds ahead for equities, we continue to see several reasons for constructive optimism. The overall fundamental backdrop for global equity markets remains supportive, with strengthening economic data expanding in almost all corners of the globe. Recall that earlier this year, the IMF raised its global economic growth forecast to 3.9 per cent for this year and next based on positive momentum in global economic data and the expected impact of U.S. tax policy changes. In the U.S., extraordinarily strong earnings momentum, corporate tax reform and fiscal stimulus plans underpin an encouraging view for stocks.
In Asia and the emerging markets, positive economic reforms coupled with improving corporate fundamentals support reasonably valued equities. On balance, we see global equity markets outperforming fixed income markets in the intermediate term. However, we do anticipate more risks and volatility ahead as investors navigate tighter monetary policy, rising bond yields, higher inflation, simmering geopolitical issues and global trade tensions. In our view, taking advantage of any temporary sell-offs and ‘buying the dips’ would remain a very prudent strategy.
In Stan Wong Managed Portfolios, we are overweight in the financials, technology, consumer discretionary and health care sectors while underweight defensive areas such as utilities and consumer staples. We also favour high quality stocks and expect dividend growers to outperform dividend payers given the rising interest rate environment. While growth stocks have largely outperformed value stocks since 2007, we expect value stocks to eventually outpace growth stocks as interest rates drift higher. When looking at geographic regions, we mainly prefer the U.S. along with Asia (emerging and developed) over other areas. As we move through the mid-to-late phase of the economic cycle, we expect a notable uptick in market volatility and would stress the importance of investment selectivity as active portfolio management strategies outperform passive approaches. In a recent article, CNBC discussed how the recent market turmoil has once again made this a stock pickers’ market. Volatility is not leaving the building anytime soon.
Last bought this month at about US$92.
As a spinoff from Abbott Laboratories in early 2013, AbbVie is a pharmaceutical drug company with strong exposure to immunology and oncology medicines. The company’s largest revenue source comes from Humira, a drug to treat rheumatoid arthritis, psoriasis, and Crohn's disease. In February, management announced a shareholder-friendly $10 billion share buyback program and boosted its dividend by 35 per cent. AbbVie's recent setback in one of its cancer drug (Rova-T) trials has pushed the stock down to fundamentally compelling and technically oversold levels, offering investors an opportunity to own a top-tier U.S. health care name at a very reasonable valuation. The commpany currently trades at a forward price-earnings multiple of 12 times, with an estimated long-term earnings compound annual growth rate (CAGR) of about 12 to 15 per cent. The shares today yield a hefty dividend of 4.1 per cent. Longer-term, AbbVie appears well-positioned with next-generation immunology drugs and a pipeline heavily weighted toward new cancer drugs. In particular, AbbVie's pipeline should lead to an increasingly strong position in the blood cancer space. AbbVie’s next quarterly earnings report date is April 26.
Additional purchase last month at about US$163.
Facebook’s recent data breach and privacy issues has caused its share price to fall to rather attractive levels for intermediate and long-term growth investors. The shares currently trade at a forward price-earnings multiple of 23 times, with a forecasted long-term CAGR of over 25 per cent.
Facebook CEO Mark Zuckerberg’s Congressional testimony this week suggested limited changes to the company’s model of monetizing user information for ad targeting. As a result, investors should not expect significant long-term negative effects to the company's platform, operations and sales growth. Facebook remains the world’s largest online social network with more than 2 billion active monthly users. The firm’s ecosystem of the Facebook app, along with Instagram, Messenger, and WhatsApp, are among the world’s most widely used apps on both Android and iPhone smartphones. With more users and usage time than any other social network, Facebook provides the largest audience and the most valuable and unique data for social network online advertising. Facebook’s ad revenue per user (ARPU) is growing, demonstrating the high return on investment (ROI) that advertisers see in working with the Facebook platform. Longer-term, Facebook will continue to benefit from the secular shift of marketing and advertising dollars to online advertising. Facebook’s next quarterly earnings report date is April 25.
TJX COMPANIES (TJX.N)
Last bought this month at around US$82.
TJX Companies is a leading off-price apparel and home fashion retailer in the U.S., Canada and worldwide operating over 4,000 stores under retail brand names including T.J. Maxx, Marshalls, Winners and HomeSense. TJX offers investors an attractive North American and international growth story, strong free cash flow generation, and a proven record of success in both strong and weak economic climates.
Given its off-price retailing platform and last-minute inventory purchasing, TJX can perform better in a climate of economic uncertainty or low demand more so than most other competitors – an important consideration for investors, given that we are in the late stages of the economic cycle. Further, TJX has managed to obtain profitability in international markets, an accomplishment realized by few peers.
Over the next several years, the most significant drivers of valuation are expected to be new store expansions, remodelling of existing stores and continued share repurchases. In its most recent quarterly earnings report, management raised TJX’s quarterly dividend by 25 per cent and authorized a new $3 billion share buyback program. TJX currently trades at a forward price-earnings multiple of 17 times with an estimated long-term CAGR of 10 to 12 per cent. The shares yield a dividend of 1.9 per cent. TJX’s next quarterly earnings report date is May 22.
PAST PICKS: APRIL 6, 2017
- Then: $59.89
- Now: $72.13
- Total return: 20.43%
- Return: 22.35%
- Then: $89.09
- Now: $121.07
- Return: 35.89%
- Total return: 36.83%
SPDR EURO STOXX 50 ETF (FEZ.N)
- Then: $36.12
- Now: $41.32
- Return: 14.39%
- Total return: 17.31%
Total Return Average: +25.49%