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

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MARKET OUTLOOK

After a blistering start to the year, global equity markets have experienced elevated turbulence in recent weeks. Investor anxiety over tighter monetary policy, rising bond yields, inflation pressures and trade policy has caused equity volatility levels to jump to heights not seen since 2015. Nonetheless, the MSCI World Index is currently showing positive performance year-to-date (up 2.8 per cent) and the S&P 500 is only about 3 per cent away from its pre-correction levels (and all-time highs). In fixed income markets, bond yields continue to push higher with U.S. 10-year treasury yields inching towards 3.0 per cent (from a recent low of 2.0 per cent) and Government of Canada 10-year bond yields above 2.2 per cent (from a recent low of 1.4 per cent).

Earlier this month, the International Monetary Fund (IMF) reiterated that President Donald Trump’s trade tariffs “are likely to cause damage not only outside the U.S., but also to the U.S. economy itself, including to its manufacturing and construction sectors, which are major users of aluminum and steel.” As a result, Trump’s tariff announcement has triggered apprehension towards equities. The chief concern for financial markets is the potential for retaliatory measures from other countries resulting in a trade war, ultimately hurting global economic growth and job creation. "It is that escalation that is in and of itself dangerous for the impact that it has on all those economies, and furthermore for the impact that it has on confidence," the IMF further stated. From our perspective, we do not see trade risks at this point upsetting solid global economic and corporate fundamentals. Of course, a reassessment is warranted should overly protective trade action from the U.S. and its trading partners escalate to where global economic growth trends are threatened.

Despite apparent and potential headwinds ahead for equities, there continues to be several reasons for constructive optimism. The fundamental backdrop for global equity markets remains supportive with strengthening economic data broadening in almost all corners of the globe. Recall that earlier this year, the IMF raised its global economic growth forecast to 3.9 per cent for this year and next based on positive momentum in global economic data and the expected impact of U.S. tax policy changes. In the U.S., extraordinarily strong earnings momentum, corporate tax reform and fiscal stimulus plans underpin an encouraging view for stocks. Indeed, the current Q4 earnings season has proven to be robust with about 77 per cent of S&P 500 companies (as of Tuesday morning) beating revenue expectations and earnings expectations. In Asia and the emerging markets, positive economic reforms coupled with improving corporate fundamentals support reasonably valued equities. On balance, we see global equity markets outperforming fixed income markets in the year ahead. However, we do anticipate more risks and volatility ahead as investors navigate tighter monetary policy, rising bond yields, higher inflation and global trade tensions. In our view, taking advantage of any temporary sell-offs and “buying the dips” would remain a very prudent strategy.  

In Stan Wong Managed Portfolios, we are overweight in the financials, technology, consumer discretionary and healthcare sectors (in this order of weighting) while underweight defensive areas such as utilities and consumer staples. We also favour high-quality stocks and expect dividend growers to outperform dividend payers. While growth stocks have largely outperformed value stocks since 2007, we expect value stocks to eventually outpace growth stocks as interest rates drift higher. When looking at geographic regions, we mainly prefer the U.S. along with Asia (emerging and developed) over other areas. As we move through the mid-to-late phase of the economic cycle, we expect an uptick in market volatility and would stress the importance of investment selectivity as active portfolio management strategies outperform passive approaches. 

TOP PICKS

ALIBABA (BABA.N)
Last bought in September 2017 at around US$172.

Alibaba is the world’s largest online and mobile commerce company measured by gross merchandise volume. The company operates China’s most popular online marketplaces, including AliExpress, Taobao and Tmall.com. Alibaba’s businesses are comprised of core commerce, digital media and entertainment, and cloud computing.

s business model has been helped by several factors – China as its core target market arguably being most important. With over 750 million Internet users, China is by far the largest Internet market in the world: over double the size of the U.S. market. Furthermore, the Internet penetration rate is only 55 per cent in China compared to 95 percent in the U.S. giving Alibaba ample runway for future growth.

In its latest earnings call, management raised its revenue growth guidance for the fiscal year to 55056 per cent (from 49-53 per cent previously). Long-term, Alibaba is well positioned to boost revenues related to digital content, entertainment, cloud computing and overseas markets. Alibaba’s valuation is attractive with the shares trading at a forward price-earnings multiple of 31 times and a forecasted long-term earnings growth rate of over 25 per cent. 

FEDEX (FDX.N)
Last bought in February 2018 at around US$245.

FedEx delivers over 14 million shipments each business day in over 220 countries and territories though a massive integrated global network. FedEx’s international fleet of over 660 aircraft and over 170,000 motorized vehicles along with over 1,800 office locations makes the business difficult and costly to duplicate for potential competitors (including Amazon).

In its latest quarterly earnings call, management signalled solid business performance ahead, with demand and pricing trends pushing higher. Guidance was raised for fiscal 2018 and excluded any benefits from tax reform. The global economic recovery clearly bodes well for transport stocks such as FedEx. Accordingly, rFedEx’s valuation is compelling, with shares trading at a forward price-earnings multiple of 16 times and an estimated long-term earnings per share (EPS) growth rate of 14 per cent.

RESTAURANT BRANDS INTERNATIONAL (QSR.TO)
Last bought in February 2018 at around C$72.

Restaurant Brands International is one of the world’s largest quick-service restaurant companies with over 24,000 locations in more than 100 countries and territories. The restaurant’s three prominent global brands include Tim Hortons, Burger King and Popeye’s Louisiana Kitchen. With its brands longer term, management plans to improve brand awareness and guest experience, exploit digital initiatives for customer acquisition and marketing purposes,and bolster international expansion.

Recent controversy over minimum wage hikes and a class-action lawsuit by franchisees in Canada has caused the share price to stumble down to 52-week lows – this provides investors with an attractive buying opportunity. Restaurants Brands International is forecasted to grow its earnings by a long-term annualized rate of 15 per cent and currently yields a 3.0 per cent dividend. This provides investors with an exceptional combination of capital growth potential and steady income.

PAST PICKS:  MARCH 9, 2017

CITIGROUP (C.N)

1. 1.1x P/B; 1.7% DIV.
2. Prepared to reward shareholders over the next few years with over $60 billion in capital returns. Expected lighter regulatory environment should also help.
3. Strong global presence differentiates them from nearly all of its peers.
4. With significant revenue coming from Latin America and Asia, they are leveraged to participate in the growth of these economies over the longer term.
5. About 50 per cent of its revenue comes from overseas markets.

• Then: $61.55
• Now: $74.91 
• Return: 21.70%
• Total: 23.64%

SUN LIFE FINANCIAL (SLF.TO)

1. Stock trending higher above rising moving averages.
2. 3.3% DIV; 10% BDVD.
3. 1.5x P/B.
4. Rising interest rate environment should be helpful.
5. Positive demographic trends in North America working in favour of Sun Life; aging population looking for more wealth and asset management products.
6. 55 per cent of revenues coming from the U.S. and Asia; looking to expand operations in Asia.

• Then: $49.40
• Now: $54.53
• Return: 10.83%
• Total return: 14.47%

MGN RESORTS INTERNATIONAL (MGM.N)
Sold in December 2017.

1. 13x EV/EBITDA.
2. Strong Las Vegas presence: MGM’s nine casinos account for 32 per cent of the total number of Las Vegas strip rooms.
3. Long-term growth opportunity in Macau.
4. Expect MGM to be awarded a gaming concession in Japan in 2019.

• Then: $25.93
• Now: $35.79
• Return: 40.73%
• Total return: 42.62%

Total return average: 26.91%

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