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

MARKET OUTLOOK

U.S. stocks continue to push higher, with each of the major equity indexes closing at new record highs Wednesday. Investor optimism over a more dovish Federal Reserve has fueled equities. This month also marked the longest economic expansion in history for the U.S. Indeed, with fiscal and monetary policy remaining accommodative, we could see the expansion continue as a slow burn for some time. According to Bloomberg consensus forecasts, U.S. GDP growth is currently expected to come in at 2.5 per cent for 2019 and 1.8 per cent for 2020.

Of course, the investment landscape for equities includes a number of potential downside risks: U.S.-China trade issues, growing geopolitical tensions in the Middle East and signs of a slowing global economy are some of the principal concerns. Near-term, equities also appear overbought from a technical perspective and may be due for a pause or consolidation. While we still see selective opportunities in the market, we recommend investors to approach equities cautiously.

In Stan Wong Managed Portfolios, we continue to favour U.S. equities over Canadian equities. We also like the Asia-Pacific region as stimulus measures in China help consumption and economic activity, though the eventual outcome of the U.S.-China trade negotiations will significantly affect our allocation in this area. Lastly, we currently have no exposure to the troubled eurozone region.

Overall, we prefer companies with high-quality attributes and strong balance sheets (high return on equity, low financial leverage and steady earnings growth) as the global macroeconomic backdrop matures and uncertainty rises. We prefer a growth-over-value approach, but would stay with defensive growth companies. Low-beta and high-dividend approaches should also outperform, given the current backdrop. Lastly, we continue to advocate an active approach and emphasize prudent stock and sector allocation.

TOP PICKS

ISHARES EDGE MSCI MIN VOL USA ETF (USMV.N)
Last bought in June 2019 at around US$61.

The USMV seeks to track the investment results of an index composed of U.S. equities that, in the aggregate, have lower volatility characteristics relative to the broader American market. With the global economic cycle maturing and geopolitical uncertainties rising, an allocation to a low volatility approach as part of an overall portfolio construction would be prudent. USMV has historically provided unitholders with a low beta and low standard deviation experience relative to the broader S&P 500. Top holdings in this ETF include Waste Management, Visa, Coca-Cola, McDonald’s and Pfizer. This ETF carries an expense ratio of 0.15 per cent.

VANGUARD HEALTH CARE ETF (VHT.N)
Last bought in May 2019 at around US$167.

VHT provides investors with exposure to a diversified basket of U.S. healthcare stocks. Top holdings include Johnson & Johnson, Pfizer, UnitedHealth, Merck and Abbott Labs.

After being the top-performing sector in 2018, healthcare has lagged all others year-to-date and is underperforming the broader S&P by a wide margin. The underperformance has been driven by worries over potential government policies that threaten current business models. Greater political scrutiny and the potential for a future Democratic mandate calling for “Medicare for All” has weighed on investors’ minds. However, the recent weakness in the sector may provide a compelling buying opportunity.

While certainly a risk, investors appear to be pricing in too great a chance of substantial government intervention. The fundamentals of the healthcare sector continue to look attractive, with solid earnings growth forecasts. With its defensive qualities (low beta, steady earnings and decent dividends) and its relative insulation from the U.S.-China trade dispute, healthcare may be poised to regain its outperformance. VHT carries an expense ratio of 0.10 per cent.

WASTE MANAGEMENT (WM.N)
Last bought in January 2019 at around US$94.

With over US$15.7 billion in annual revenues, Waste Management is 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.

In December, 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 it). Waste Management shares provide investors with a high quality, low beta investment with defensive growth characteristics. The company has strong free cash flow along with steady revenues and earnings, important attributes in slowing economic environment. Waste Management currently trades at 27-times forecast earnings, with long-term estimated earnings per share growth rate of 9 per cent. The shares yield a 1.8-per-cent dividend, which is forecasted to grow modestly over the next several years. The company reports its next quarterly results on July 25.  

PAST PICKS: JULY 4, 2018

AMERICAN EXPRESS (AXP.N)

• Then: $97.84
• Now: $125.86
• Return: 29%
• Total return: 31%

RESTAURANT BRANDS INTERNATIONAL (QSR.TO)

• Then: $79.31
• Now: $92.87
• Return: 17%
• Total return: 21%

IQIYI INC (IQ.O)

• Then: $32.98
• Now: $20.75
• Return: -37%
• Total return: -37%

Total return average: 5%

WEBSITE: stanwong.com
TWITTER: @StanWongWealth