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

MARKET OUTLOOK

North American equity markets are off to a blistering start this month. The upward surge in equity prices largely reflect the marked decline in U.S. political uncertainty and encouraging COVID-19 vaccine news. These developments have led to a sharp improvement in the outlook for the global economy.

After months of speculation and investor angst, the U.S. elections have resulted in a split Congress which makes massive future policy changes unlikely. Perhaps more importantly, breakthrough announcements from Pfizer/BioNTech and Moderna on high-efficacy results for their respective COVID-19 vaccines has provided greater visibility on a return to more normal economic activity. Indeed, a clearer path for U.S. and global economic expansion has emerged recently as vaccines shape the outlook for 2021.

Of course, equity markets still face potential risks and headwinds ahead. A fiscal stimulus package in the U.S. remains elusive with the timing and magnitude uncertain. Recent economic data indicate that growth rates around the world have stalled and the global economy needs more support until business activity normalizes.

A recent surge in new COVID-19 cases and rising hospitalizations around the world pose a near-term economic risk as economic lockdowns are reintroduced. Additionally, the logistics around delivering a vaccine remain complex – storage, delivery and distribution on a massive scale will certainly present challenges. Lastly, should the virus itself mutate, this would most certainly present significant risks and make some potential vaccines less effective.

We continue to employ active stock, industry and sector selection. Indeed, market breadth remains weak with over 45 per cent of S&P 500 constituents still underwater year-to-date. From a sector perspective, technology, consumer discretionary and communication services have been clear winners while energy, financials and real estate have been severe laggards. We favour companies with dominant long-term secular growth prospects and high-quality attributes. Equities with dividend appreciation characteristics are encouraged over those with high yields (and no dividend growth). Lastly, we have also recently added several “back-to-normal” trades to our portfolios to reflect the growing odds of eventual economic normalization. 

TOP PICKS

Mastercard Inc (MA NYSE) last bought in October 2020 at ~US$311.

Mastercard is one of the world’s largest global payments companies. With over US$15 billion in revenues, Mastercard operates in more than 210 countries and processes transactions in over 150 currencies. Near-term, a return to a more normal economic backdrop via recent COVID-19 vaccine developments should help in the recovery of consumer spending volumes, particularly in more lucrative travel and cross-border transactions. Longer-term, the secular shift from cash payments to electronic payments provides a long runway for growth. Indeed, electronic payments on a global scale only surpassed cash payments a couple of years ago. After falling almost 10 per cent (estimated) this year, annualized revenue growth is expected to be 16 to 17 per cent over the next few years. Mastercard reports its next quarterly results on Oct. 29 per cent.

NVIDIA (NVDA NASD) last bought in September 2020 at ~US$495.

With nearly US$16 billion in expected 2021 revenues, Nvidia is the leading designer of graphics processing units (GPUs) that enhance the experience on computing platforms. Nvidia’s chips are used in a variety of end markets, including high-end PCs for gaming, data centers, and automotive infotainment systems. In recent years, the firm has broadened its focus from traditional PC graphics applications such as gaming to more complex and favorable opportunities, including artificial intelligence (AI) and autonomous driving, furthering its revenue and earnings opportunities. Demand for Nvidia’s products are overwhelming. Last night, Nvidia reported revenue and earnings results that surpassed analyst expectations and set new quarterly records for both metrics. Longer-term, both revenue growth and earnings growth are expected to top 25 per cent over the next few years.

Simon Property Group Inc (SPG NYSE) last bought this month at ~US$80

Simon Property Group is the largest REIT and premier shopping mall operator in the U.S. Simon’s worldwide portfolio includes interests in over 200 properties primarily in America, but also in Canada, Mexico, Asia and Europe. The REIT’s high-quality properties provide unique shopping experiences and typically have domestic and international tourist appeal. While online sales generally will continue to grow at a significant pace compared to brick-and-mortar, physical retail sales growth can still be positive in attractive, high-quality locations such as those operated by Simon Property. With the recent news of COVID-19 vaccine breakthroughs and expectations of an eventual return to normal economic activity, Simon Property Group shares look attractive given its depressed price (down more than 45 per cent year-to-date) and valuation. It reports its next quarterly results on Feb. 4. 

PAST PICKS: NOV. 21, 2019

American Tower (AMT NYSE)

• Then: $213.54
• Now: $236.90
• Return: +11%
• Total Return: +13%

CVS Health (CVS NYSE)

• Then: $74.94
• Now: $66.16
• Return: -12%
• Total Return: -9%

Facebook (FB NASD)

• Then: $197.93
• Now: $270.04
• Return: +36%
• Total Return: +36%

Total Return Average: +13%

Website: www.stanwong.com
Twitter: @StanWongWealth