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 brief selloff last week, U.S. equity benchmarks have rebounded to post new record highs. Here in Canada, the TSX has largely been wedged in a sideways trend since the beginning of the year as energy prices struggle and uncertainties about the housing market continue. While U.S. equity valuations appear somewhat extended with the S&P 500 trading at over 18x forward price-earnings, corporate earnings momentum has been strong. As well, the prospects for tax reform and deregulation in the U.S. remain supportive, despite the timing and implementation being less than predictable.

From a global perspective, economic growth and earnings forecasts are trending upward in all major regions for the first time since 2010. In Europe, political risks are ebbing while global reflation and a low Euro currency are helping industrials and multinational exporters. In Asia, financial sector reform and rising account surpluses are encouraging. China’s economic growth and corporate earnings outlook remain solid. With the emerging markets, global reflation and growth in the developed world has been generally supportive.

In Stan Wong Managed Portfolios, we remain constructive on cyclical equities (financials, technology and industrials) while underweight defensive stocks and traditional government bonds. We also generally favour high-quality stocks and expect dividend growers to outperform dividend payers. We still prefer U.S. equities (and the U.S. dollar) over Canadian equities but have allocated some cash to international equities based on attractive relative valuations.

We expect volatility to pick up from its current low as the year progresses — particularly if the political backdrop in Washington deteriorates. We continue to believe that correlations between stocks and stock sectors will trend lower while the dispersion of returns increases, both of which are constructive for active portfolio management. Stock and stock sector correlation in the S&P 500 has already fallen below historical averages. As trade, tax reform and deregulation policies become clear, they will impact sectors and companies differently based on their supply chains and geographical exposures. The direction and pace of interest rate moves will also cause equity sector correlations to fall. We expect this differentiation in fundamentals to create more “winners and losers,” heightening the dispersion of equity returns further. We believe an active portfolio management strategy is best positioned to benefit in this environment.

TOP PICKS

FACEBOOK (FB.O) – Last bought in April 2017 at approximately US$139
Facebook is the world’s largest online social network with more than 1.9 billion active monthly users. Its ecosystem consists mainly of the Facebook application, Instagram, Messenger, WhatsApp, and many features surrounding these products. With more users and usage time than any other social network, Facebook provides the largest audience and the most valuable data for advertisers. Facebook’s ad revenue per user (ARPU) is growing, providing a long foreseeable runway for sales and earnings to grow. Despite the share price hitting an all-time high this month, Facebook’s valuation appears more attractive than ever with the shares trading at a forward price-earnings multiple of 25x — near a historical low. Facebook is forecasted to deliver a remarkable long-term earnings per share (EPS) compound annual growth rate (CAGR) of over 25 per cent.

KONINKLIJKE PHILIPS NV (PHG.N) – Last bought in April at approximately US$34
Philips is a global health technology company headquartered in the Netherlands. Philips operates in more than 100 countries and offers products and services in diagnostic imaging, image-guided therapy, patient monitoring and health informatics, as well as in personal health and home care. Broadly speaking, high-quality companies in the Eurozone appear attractive given the region’s recovery in corporate earnings and receding political risks. In addition, Eurozone-domiciled multinational exporters such as PHG should benefit from the weak Euro currency. Looking ahead, PHG shares should climb higher due to continued cost cutting and operational leverage measures. The divestiture of its lighting solutions division and the consolidation of its health care and consumer lifestyle divisions should provide catalysts for further share price gains. Philips currently trade at 10x enterprise value/EBITDA and pay a 2.5 per cent dividend yield.

ISHARES ASIA 50 ETF (AIA.O) – Last bought in April 2017 at approximately US$51
The iShares Asia 50 ETF provides diversified exposure to 50 of the largest, most established Asian companies in a single strategy. The Asia 50 Index currently trades at under 12x forward price-earnings and 1.5x price-to-book — significant valuation discounts relative to North American equity benchmarks. Longer term, Asian equities will be supported by strong demographics, rising incomes and strong relative economic growth. Top holdings in the iShares Asia 50 ETF include Samsung Electronics, Tencent Holdings, Taiwan Semiconductor and China Mobile. The ETF is most heavily weighted in the information technology and financial sectors.
 

PAST PICKS: APRIL 6, 2016

CINEPLEX (CGX.TO)

• Then: $50.77
• Now: $51.72
• Return: +1.87%
• TR: +5.41%

CELGENE (CELG.O)

• Then: $108.22
• Now: $116.78
• Return: +7.90%
• TR: +7.90%

NIKE (NKE.N) – Sold in November 2016

• Then: $60.31
• Now: $52.59
• Return: -12.80%
• TR: -11.71%

TOTAL RETURN AVERAGE: +0.53%