Stan Wong, director and portfolio manager at Scotia Wealth Management
Focus: North American large caps and ETFs

MARKET OUTLOOK

Global equities have staged an impressive rebound following the sharp selling in the fourth quarter that culminated in late December. As various macroeconomic and geopolitical concerns appear to ease, investors seem to have withdrawn (at least for the time being) from the notion that the sky is falling. Last week marked the fourth consecutive week of stock gains, boosted by positive U.S. bank earnings and encouraging developments in the U.S.-China trade narrative. Recession concerns have also eased somewhat, alongside worries that the Federal Reserve will push interest rates higher too quickly. Indeed, U.S. labour and manufacturing numbers remain supportive. As well, the Conference Board Leading Economic Index (LEI) – an index that combines 10 forward-looking economic datapoints into a highly predictive indicator of future growth (or recession) continues to indicate that the U.S. economy is on firm footing. Nonetheless, given the strong rally over the last several weeks, a near-term pause or consolidation for equities is very possible at this stage. 

In Stan Wong Managed Portfolios, we continue to favour U.S. equities as solid corporate earnings growth and healthy economic fundamentals underpin a constructive view. Our mandates remain somewhat underweight Canadian equities and we have no current allocation to the troubled European region. We have limited holdings in Asia and emerging markets – although attractive valuation discounts in these geographies may lead to a greater allocation in the near future. In general, we prefer companies with high-quality attributes (high return on equity, low financial leverage, and stable earnings growth) as the global macroeconomic backdrop matures and becomes less certain moving forward. Financials, health care and communication services represent our largest sector weightings. Going forward, we expect a measured shift to more defensive and lower beta stocks in our portfolio models over the next few quarters.

We anticipate volatility levels ahead to be more pronounced and uneven moving forward. Equity markets are expected to be choppy and frustrating. While we expect equities to be positive this year, it is difficult to make the case that we will see new highs in the broader equity markets without a clear resolution in the U.S.-China trade disputes. A more balanced approach to risk and reward in portfolios would be prudent. Investors who are overweight FAANG stocks, high beta and highly cyclical equities and high yield, lower credit bonds should consider a greater allocation to defensive, lower beta and higher-quality equities along with traditional government bonds and treasuries as portfolio diversifiers. In our portfolios, we continue to be active and emphasize stock selectivity while using stop-loss and other risk management strategies.

TOP PICKS

DOLLAR GENERAL (DG.N)
Last bought in January at $113. 

Dollar General is the largest discount retailer in the U.S., with over 15,000 stores in 44 states. Dollar General offers a broad selection of merchandise, including consumables, seasonal, home products and apparel. Over 75 per cent of the company’s revenues are from recurring sales of consumables (which include paper and cleaning products, packaged and perishable food, tobacco, and health and beauty items). This allows for steady revenues and earnings in any economic landscape. Dollar General’s broad network of stores are often located in rural locations and smaller town, areas that are off the radar of other giant mass merchant competitors.

UNITEDHEALTH GROUP (UNH.N)
Last bought in January at $264.

With over US$225 billion in revenues, UnitedHealth Group is the largest managed health care company in the U.S. UnitedHealth Group owns and manages organized health systems in the U.S. and internationally, providing employers products and resources to plan and administer employee benefit programs. The company also serves the health needs of older Americans, provides specialized care services, and provides health care information and research to providers and payers. UnitedHealth has the largest and most diverse membership base within the health insurance market, giving it competitive advantages that many of its competitors are unable to match. The company’s earnings track record is remarkable with 40 consecutive quarters of positive earnings surprises.

WASTE MANAGEMENT (WM.N)
Last bought in January at $94.

Waste Management ranks as the largest integrated provider of traditional solid waste services in the U.S., operating roughly 250 active landfills and more than 300 transfer stations. The company serves more than 20 million residential, industrial, municipal and commercial customers in the U.S. and Canada with the majority of its revenues from its collection segment. Last month, management announced a share buyback program of up to US$1.5 billion along with a 10 per cent increase in its quarterly dividend (marking the sixteenth consecutive year the company has increased its quarterly dividend). Waste Management shares provide investors with a high quality, low beta investment with both defensive and growth characteristics. The company has strong free cash flow, a high five-year average adjusted return on equity (ROE) along with steady revenues and earnings – important attributes in a maturing economic environment.

PAST PICKS: JAN. 25, 2018

APPLIED MATERIALS (AMAT.O)

Sold in August 2018 at $43.

• Then: $55.76     
• Now: $34.31
• Return: -38%
• Total return: -37%

ROGERS COMMUNICATIONS (RCIb.TO)

• Then: $60.34
• Now: $72.61
• Return: 20%
• Total return: 24%

SAMSONITE INTERNATIONAL (SMSEY.PK)

Sold in April 2018 at $24.

• Then: $21.79
• Now: $14.35
• Return: -34%
• Total return: -34%

Total return average: -16%

WEBSITE: www.stanwong.com
TWITTER: @StanWongWealth