MARKET OUTLOOK:

Equity markets and investors alike have been challenged thus far in 2022. Worries over inflation, rising interest rates and geopolitical tensions have been at the top of investors’ minds. 

However, these concerns may be somewhat misplaced in our opinion. With inflation, our findings show that equity markets generally do not become materially impaired where inflation stays below 6 per cent. 

While the U.S. inflation rate currently stands at 7.5 per cent, we expect supply chain disruptions to ease in the coming quarters and alleviate inflationary pressures. 

With interest rates, while we do expect yields to continue climbing over the intermediate term, history shows that rising rates have more typically coincided with bullish equity markets. 

Lastly, escalating tensions at the Russia-Ukraine border have clearly heightened investors’ fears. However, looking at past geopolitical events, these occurrences have rarely proven to have any meaningful or lasting impact on the global economy and equity markets. In early 2014, the S&P 500 Index fell nearly 6 per cent leading up to Russia’s annexation of Crimea but for the full 2014 calendar year, the S&P 500 Index returned almost 14 per cent.

It is important to understand that in the absence of a looming recession (or black swan event), equity bear markets are unlikely to materialize. The global economy continues to recover and reopen from the pandemic, producing solid economic data with a rather limited possibility of a recession. 

With the recent equity market pullback, we see a compelling opportunity to take advantage of misplaced investor fears. Indeed, stock and sector selection will be increasingly important as the economic cycle matures. 

Specifically, investors heavily allocated to richly valued technology stocks should take caution. The S&P 500 Information Technology Index currently trades at a 6.5x price-to-sales multiple, a level last seen in March 2000 before the technology index slid 82.5 per cent over the next 19 months. Also, with the technology sector outpacing the broader S&P 500 Index in each of the past eight calendar years, further outperformance is unlikely from our perspective.

In Stan Wong Managed Portfolios, we prefer cyclical stocks and have tilted our allocation to value stocks. The financial, energy and health care sectors look particularly attractive to us. 

From a geographic perspective, we like U.S. equity markets for its breadth and depth of high-quality names but see valuations in international markets as somewhat more attractive. In our fixed income allocation, we are underweight government bonds in favour of inflation-protected bonds and short-duration corporate bonds.

TOP PICKS:

MANULIFE FINANCIAL (MFC TSX)
Last bought last month at ~$24
With $1.4 trillion in assets under management and administration and a market capitalization of over $50 billion, Manulife is one of the world’s largest life insurance companies. Manulife offers annuity, pension, life insurance, health insurance and asset management products operating in North America and Asia. 

With Asia representing over 50 per cent of Manulife’s overall revenue, the company stands to benefit long-term from the region’s growing middle class and its increasing demand for life insurance, health insurance and wealth management. 

As well, an aging global population is a catalyst for greater demand for MFC’s wealth management offerings. Near-term, rising interest rates should help life insurers such as Manulife. 

MFC currently trades at about 1.0x price-to-book, a meaningful discount to its peer group. The shares pay an attractive 5.0 per cent dividend yield which is expected to grow moderately over the next few years. Manulife reports its next quarterly results on May 11th.    

SHELL PLC (SHEL NYSE)
Last bought this month at ~US$52
Formerly Royal Dutch Shell, Shell PLC is one of the world’s largest integrated oil and gas companies with operations in over 70 countries. Shell boasts worldwide proven reserves of 1.3 billion barrels of oil equivalent and is forecasted to generate over US$266 billion in 2022 revenues. 

Earlier this month, Shell reported strong quarterly earnings results and announced an $8.5-billion share buyback program along with a dividend increase. Management’s efforts to reduce costs and improve capital efficiency have been successful. 

As one of the principal LNG players in the world, Shell stands to benefit from the rise in global gas demand and stronger prices over the next decade. The shares yield a 3.4 per cent dividend which is expected to grow generously over the next several years. The company reports its next quarterly results on May 5th.    

VANGUARD GLOBAL VALUE FACTOR ETF (VVL TSX)
The Vanguard Global Value Factor ETF provides exposure to a broadly diversified basket of global equities deemed to have low prices relative to their fundamental measures of value. These value measures may include price-to-book, price-to-earnings, and price-to-cash flow ratios. 

In 2021, the Vanguard Global Value Factor ETF outpaced its benchmark world equity index by over 10 per cent. Top holdings in this ETF include CVS Heath, Dow, ConocoPhillips, General Motors and FedEx. The VVL ETF also pays a 1.5 per cent indicated dividend yield.

 
PAST PICKS: February 25, 2021

iShares Global Materials ETF (MXI NYSE)

• Then: $85.31
• Now: $85.06
• Return: -3%
• Total Return: 1%

Prudential Financial (PRU NYSE)

• Then: $87.91
• Now: $105.47
• Return: 20%
• Total Return: 25%

Yum China Holdings (YUMC NYSE)

• Then: $60.16
• Now: $49.73
• Return: -17%
• Total Return: -17%

Total Return Average: 9%