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

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MARKET OUTLOOK

With the summer months approaching, global equity markets continue to seesaw as investors evaluate solid economic and corporate fundamentals against rising interest rates and geopolitical tensions. Strong earnings growth is expected to continue this year, but market participants may be worried that earnings could soon be peaking. While the effects of the U.S. tax reform have been positive and have provided a boost to corporate results, year-over-year comparisons will become more difficult from here. Alongside "peak-earnings" concerns, investors are also anxious over rising interest rates with 10-year U.S. treasury yields breaking above 3 per cent recently. Of course, market participants seem to be most concerned with the possibility of an escalating trade dispute between the world’s two largest economies. Last week, the International Monetary Fund (IMF) declared that “the stakes are high because the health of the global economy depends on health trade flows. The rebound in trade has recently contributed to stronger global economic growth. And yet, rising protectionism could stop this positive momentum in its tracks.”  Last month, the IMF predicted the world economy’s strongest upswing since 2011 will continue for the next two years. But it also warned that growth will fade as central banks tighten monetary policy and cautioned that the expansion could be derailed if countries resort to punitive trade penalties. These concerns suggest that volatility is likely to remain relatively elevated. For the intermediate term, global equities could remain stuck in the same trading range they've been in since the sharp correction we encountered in early February. 

From a fundamental perspective, over 95 per cent of S&P 500 companies have reported this earnings season and the results have been very encouraging. Over 80 per cent of the companies that have reported beat Street consensus earnings forecasts, while over 74 per cent have surpassed analysts’ revenue expectations. Cyclical equities including technology and consumer discretionary sectors continue to lead the U.S. stock markets year-to-date, while the energy sector has surged up more recently amid rising oil prices. The more defensive segments of the market such the consumer staples, telecom, real estate and utilities continue to languish. Additionally, the Conference Board Leading Economic Index (LEI), a closely watched index used to forecast global economic trends based on 10 key metrics, reported another strong showing last week and continues to suggest little near-term risk of an economic slowdown. From a technical viewpoint, global equity indexes continue to indicate rising trendlines and a bull market that's still intact.

In Stan Wong Managed Portfolios, we're most heavily weighted towards financials, technology and consumer discretionary stocks while near zero-weight in defensive areas such as consumer staples, real estate and utilities. We favour high-quality stocks and expect dividend growers to outperform dividend payers given the rising interest rate environment. Although growth stocks have largely outperformed value stocks since 2007, we expect value to eventually outpace growth as interest rates drift higher. When looking at geographic regions, we mainly prefer the U.S. along with Asia (both emerging and developed) over other areas. On balance, we see global equity markets outperforming fixed income markets in the intermediate term. We do however anticipate more risks and volatility ahead as investors navigate tighter monetary policy, rising bond yields, higher inflation, simmering geopolitical issues and global trade tensions. We stress the importance of investment selectivity as active portfolio management strategies outperform passive approaches.

TOP PICKS

Stan Wong's Top Picks

Stan Wong of Scotia Wealth shares his top picks: Bank of America, Caterpillar and Tencent.

BANK OF AMERICA (BAC.N)
Last bought this month at around US$30.

Bank of America is one of the largest financial institutions in the U.S., with more than $2 trillion in assets. Its operations are divided into four major segments: consumer banking, global wealth and investment management, global banking, and global markets. A steady economic environment, lower corporate tax burdens, rising interest rates and less regulation create a favourable backdrop for Bank of America and other U.S. financial stocks to perform well. Last month, it reported better-than-expected results for the first quarter of the year, driven by strong loan growth and lower taxes. Moving forward, we should expect additional return-of-capital to shareholders through stock buyback plans and dividend increases. In 2017, the bank announced share buyback plans worth US$17 billion. Today, Bank of America trades at a price-to-book ratio of 1.3 times and a 1.6 per cent dividend yield.

CATERPILLAR (CAT.N)
Last bought this month at around US$149.

Caterpillar is the world’s largest manufacturer of specialized heavy construction and mining equipment. As the global economy accelerates, a recovery in Caterpillar's key markets is far-exceeding expectations after several years of tumbling sales. Both equipment and aftermarket sales are surging in all segments and most regions. A recovery in commodity prices has also helped the company. Last month, Caterpillar reported quarterly results that beat analyst expectations on both revenue and earnings measures. Management also raised its profit outlook for the year by 23 per cent. The stock currently trades at a forward price-earnings multiple of 14.5 times with a forecasted long-term earnings compound annual growth rate (CAGR) of over 20 per cent. The shares also yield a 2 per cent dividend, which is expected to grow over the next few years.

TENCENT HOLDINGS – ADR (TCEHY.PK)
Last bought this month at  around US$48.

Tencent Holdings Ltd is an investment holding company providing Internet and mobile value-added services (VAS), media, entertainment, payment systems and online advertising services in China. Tencent ranks among the top five of the world’s largest Internet companies by market capitalization and revenue. Last week, the company reported quarterly earnings result that beat market expectations, fueled by its booming gaming business. Gaming remains Tencent’s main growth driver while ad sales are quickly expanding due to its social media application’s (WeChat) one billion monthly active users and high-level of engagement. Tencent's gaming unit is particularly benefiting from the massive popularity of Fortnite, a multiplayer battle-royale game. Tencent owns a large stake in Epic Games, the developer of Fortnite. Longer-term, the company provides a fascinating growth story with a forecasted long-term earnings per share (EPS) compound annual growth rate (CAGR) of 25 to 30 per cent.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
BAC Y Y Y
CAT Y Y Y
TCEHY Y Y Y

 

PAST PICKS: MAY 26, 2017

Stan Wong's Past Picks

Stan Wong of Scotia Wealth reviews his past picks: Facebook, Koninklijke Philips and the AIA.

FACEBOOK (FB.O)

  • Then: $152.13
  • Now: $185.93
  • Return: 22%
  • Total return: 22%

KONINKLIJKE PHILIPS NV (PHG.N)
Sold last month at  around US$42.

  • Then: $35.13
  • Now: $42.13
  • Return: 20%
  • Total return: 23%

ISHARES ASIA 50 ETF (AIA.O)

  • Then: $56.80
  • Now: $67.10
  • Return: 18%
  • Total return: 20%

Total return average: 22%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
FB Y Y Y
PHG N N N
AIA Y Y Y

 

TWITTER: @StanWongWealth
WEBSITE: www.stanwong.com