Stan Wong, portfolio manager at Scotia Wealth Management
FOCUS: North American Large Cap Stocks & ETFs

MARKET OUTLOOK: 

Global equity markets have started 2021 on a positive note as investors view the rollout of COVID-19 vaccines and recent U.S. political developments positively. While the coronavirus is still clearly in control socially and economically, the vaccines will allow for an eventual reopening of the global economy and normalization of business activity. This, in turn, will give corporations and equity markets a path towards a solid earnings recovery. On the U.S. political front, the change in Senate control should result in an increase in spending and more fiscal support, near-term positives for stocks. In addition, central banks and governments around the world are expected to again deliver an assist to stocks with low interest rates and expansionary fiscal policy.  

However, from a technical perspective, equity markets look somewhat overbought and could be due for a near-term pause or consolidation. From a fundamental perspective, valuations appear elevated in the absence of meaningful earnings improvement. As the ongoing challenges of the global pandemic unfold this year, equity markets will likely face bouts of volatility as the potential for higher-than-anticipated virus caseloads and rising hospitalizations loom. Moreover, the logistics around delivering a vaccine remain complex and storage, delivery and distribution on a massive scale could present serious challenges. Another risk would be further mutation of the coronavirus, which would certainly pose a tremendous hazard and obstruct the reopening of the global economy. Indeed, the path for the stock market is likely to prove uneven this year and perhaps, at times, uncomfortable. 

In Stan Wong Managed Portfolios, we continue to employ active stock, industry and sector selection as the global economy recovers from the shock of the pandemic. We expect market leadership to broaden out beyond technology stocks to include financials, industrials and other economically sensitive areas that were largely left behind in last year’s rally. 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 of high-quality names and favour Asia Pacific as a prime beneficiary of a cyclical upswing, a weaker U.S. dollar and calmer trade relations with the U.S.    

TOP PICKS:

Alibaba (BABA NYSE) last bought January 2021 at ~US$237
Alibaba is one of the world’s largest online and mobile commerce companies with over US$107 billion in revenues. The company accounts for nearly 60 per cent of all online retail spending in China and has an approximate 45 per cent share of the Chinese cloud computing market. Alibaba’s digital payment service is offered through its subsidiary, Ant Group. China’s regulatory scrutiny has triggered a 30 per cent sell-off in the share price, creating a buying opportunity for investors in a long-term secular growth name. Indeed, Alibaba’s revenue is forecasted to grow by more than 30 per cent annualized over the next few years. Long-term, we expect Alibaba to benefit from a long runway of user growth given China’s growing middle class and overall economy. In addition, Alibaba will benefit from the ongoing shift of China's digital commerce market from consumer-to-consumer to business-to-consumer. The shares trade at an attractive valuation with a 20 times forward price-earnings multiple and a forecasted 20 per cent annualized earnings growth rate. Alibaba reports its next quarterly results on Feb. 12.

Simon Property Group Inc (SPG NYSE) last bought in November 2020 at ~US$80
Simon Property Group is the largest retail REIT and the premier shopping mall operator in the U.S. Simon’s worldwide portfolio includes interests in over 200 properties primarily in the U.S. but also in Canada, Mexico, Asia and Europe. The company’s high-quality properties provide unique shopping experiences and typically have domestic and international tourist appeal. While online sales will largely continue to grow at a faster pace than brick-and-mortar sales, physical retail sales growth can still be positive in attractive, prime locations such as those operated by Simon Property. With the COVID-19 vaccine breakthroughs and expectations of an eventual return to normal economic activity, Simon shares look attractive given its depressed price (down more than 42 per cent last year) and dividend yield of 6.1 per cent. Simon Property reports its next quarterly results on Feb. 4.  

Wells Fargo & Co (WFC NYSE) last bought in December 2020 at ~US$28
Wells Fargo is one of the largest banks in the U.S., with assets of US$1.9 trillion and 7,200 locations. Broadly speaking, market sentiment has recently become increasingly bullish on the U.S. banking sector: the vaccine rollout, fiscal stimulus plans and a steepening yield curve are all positives. Under these conditions, loan demand should climb and loan defaults should shrink. Additional share buybacks and higher dividend payouts possibly in the near future could also help the shares. Moreover, a revamped senior management team at Wells Fargo has been focusing on cost controls and increasing the bank’s efficiencies. With a 44 per cent downturn in 2020, Wells Fargo shares look attractive today given that it is one of only two large banks that trade below tangible book value. Wells Fargo reports its next quarterly results on Jan. 15.

PAST PICKS: January 30, 2020

Booking Holdings (BKNG NASD)

• Then: $1,872.09
•  Now: $2,201.85
•  Return: +18%
• Total Return: +18%

Merck & Co. (MRK NYSE)

• Then: $86.50
• Now: $82.89
• Return: -4%
• Total Return: -1%

Starbucks (SBUX NASD)

• Then: $85.84
• Now: $101.71
• Return: +18%
• Total Return: +20%

Total Return Average: +12%