Stan Wong's Market Outlook
Stan Wong, portfolio manager at Scotia Wealth Management
Focus: North American large cap stocks and ETFs
From a technical perspective, North American equity markets look somewhat extended as they approach potential resistance levels. The markets have also been trading near overbought readings for several months now. Fundamentally, equity market valuations appear elevated but a meaningful improvement in corporate earnings in the coming quarters should ease valuation worries. The implications of rising bond yields and excess inflation are also near-term risk considerations as any indication of a possible tapering of quantitative easing programs could trigger market volatility. Lastly, new COVID-19 variants pose a potential hazard given their potential to disrupt economic re-openings.
We expect market leadership to broaden out beyond technology stocks to include financials, materials, industrials and other economically sensitive sectors. In our portfolio mandates, we favour companies with dominant long-term secular growth prospects and high-quality attributes. We have increased exposure to select cyclical sectors and industries that are positioned to benefit from the broad economic recovery. We are overweight U.S. equities for its breadth and depth of high-quality names and favour Asia Pacific as a leading beneficiary of a cyclical upswing, a subdued U.S. dollar and calmer U.S.-China trade relations.
iShares Global Materials ETF (MXI NYSE) last bought in January 2021 at ~US$81
The iShares Global Materials ETF provides exposure to a diversified basket of global large and mid-cap companies involved in the production of raw materials, including metals, chemicals and forestry products. Accommodative monetary and fiscal policies coupled with the worldwide vaccine rollout is improving the prospects for a global economic recovery and a new commodity cycle. Along with a subdued U.S. dollar and a resurgent Chinese economy, these factors have provided a strong tailwind for the materials sector. The potential for greater traction in the Biden administration’s clean energy and infrastructure initiatives could also further the demand for basic materials. The global materials sector has largely underperformed the broader MSCI World Index since 2008. However, since last March, the materials sector has outpaced the broader equity index. Top holdings in the iShares Global Materials ETF include Linde PLC, BHP Group, Rio Tinto, Freeport-McMoran and Vale.
Prudential Financial (PRU NYSE) last bought in November 2020 at ~US$78
With over US$1.7 trillion in assets under management, Prudential Financial is a global diversified financial services company offering life insurance, annuities, retirement-related services, mutual funds and investment management. Prudential is also the second-largest life insurance company in the U.S. Long-term interest rate yields have been rising since last summer and the trend is expected to continue. This benefits financial services companies and particularly, life insurers like Prudential. Over the next three years, the company plans to reallocate up to US$10 billion of capital back to shareholders through dividends and share repurchases. Prudential currently trades at just over 50 per cent of book value, a significant discount to its peer group and its own longer-term averages. The shares also pay an attractive dividend yield of 5.1 per cent. The company reports its next quarterly results on May 5.
Yum China Holdings (YUMC NYSE) last bought this month at ~US$60
Yum China Holdings is the largest restaurant company in mainland China with over 10,000 restaurants in over 1,500 cities and towns. As a spin-off from its former parent Yum! Brands in 2016, Yum China operates popular quick-service restaurants KFC, Pizza Hut and Taco Bell brands amongst several other concepts in China. To meet China’s growing consumption demand, Yum China expects to add 1,000 new restaurants in 2021 and expand to 20,000 restaurants by 2030. Longer-term, a growing Chinese middle class, rising disposable incomes, longer working hours for urban consumers and a relatively young population should drive restaurant spending at Yum China’s restaurants. Indeed, the company’s revenue is forecasted to grow by more than 13 per cent annualized over the next few years. It reports its next quarterly results on April 28.
PAST PICKS: FEB. 27, 2020
Facebook (FB NASD)
- Then: $189.75
- Now: $265.56
- Return: 40%
- Total Return: 40%
Nike (NIKE NYSE)
- Then: $88.55
- Now: $138.81
- Return: 57%
- Total Return: 58%
iShares Edge MSCI Minimum Volitility USA ETF (USMV NYSE)
- Then: $62.99
- Now: $67.31
- Return: 7%
- Total Return: %
Total Return Average: 36%