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

MARKET OUTLOOK

Global equities have continued their sideways pattern with the bulk of this year’s returns accumulated in the first quarter. An apparent de-escalation in U.S.-China trade tensions and a positive start to the third quarter earnings season has kept investors somewhat optimistic. Further expectations of a more dovish Federal Reserve have also buoyed the equity markets. The U.S. economic expansion now stands at 124 months, the longest in history. With fiscal and monetary policy remaining accommodative, we could see it extend further yet in a slow-burning, low-growth pace. According to Bloomberg consensus forecasts, U.S. GDP growth is expected to come in at 1.7 per cent for 2020 and 1.8 per cent for 2021. 

Of course, the landscape for the global economy and equities include a number of potential downside risks. Protectionism, falling global trade, weakening manufacturing data, slowing corporate earnings and geopolitical unrest are some of the main concerns. Indeed, trade disputes and geopolitical frictions have become powerful drivers of the economy and markets. While equities could grind higher on the back of solid earnings, the path would likely be punctuated with periods of elevated volatility. Against this backdrop, we recommend investors to approach equities cautiously as sector and security selection remain critical.

In Stan Wong Managed Portfolios, we continue to overweight U.S. equities over Canadian equities. We’re still underweight international and emerging market equities, given geopolitical tensions and the potential impact of a China slowdown. 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 like defensive growth, low-beta and high-dividend strategies given the current late-cycle, low-rate environment. As market uncertainties rise, one of our primary investment themes today is to enhance portfolio downside protection and resilience through proper asset allocation and rigorous sector and security selection.

TOP PICKS

ISHARES EDGE MSCI MIN VOL USA ETF (USMV:UN)
Last bought in June 2019 at $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 U.S. equity 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 sensible. Over the past three- and five-year periods, the USMV ETF has provided investors with lower volatility (standard deviation) and higher returns than the broader S&P 500. Top holdings in this ETF include Coca-Cola, Waste Management, Verizon, PepsiCo and Visa. The USMV ETF carries an expense ratio of 0.15 per cent.

MERCK (MRK:UN)
Last bought this month at $81.

With nearly US$46 billion in expected revenues for 2019 and its products marketed in over 140 countries, Merck is one of the world’s largest healthcare companies. It has operations in pharmaceutical, animal health and consumer care. Merck’s core product categories include diabetes, oncology, vaccines and hospital acute care. The company’s wide lineup of high-margin drugs and robust pipeline of new drugs should ensure strong revenue and earnings growth over the long-term. Indeed, Merck has reported 22 consecutive quarters of positive earnings surprises. The shares offer investors a defensive growth name with an attractive valuation. Merck trades at 17 times forecast earnings with a long-term estimated earnings growth rate of 10 to 11 per cent. The shares also yield a healthy 2.7 per cent dividend.

RESTAURANT BRANDS INTERNATIONAL (QSR:CT)
Last bought this month at $89.

Restaurant Brands is the world’s third-largest quick service restaurant company with more than US$32 billion in system-wide sales and approximately 26,000 restaurants in more than 100 countries. The company operates through three restaurant segments: Tim Hortons, Burger King and Popeye’s Louisiana Kitchen. Management strategy at Restaurant Brands includes improving brand awareness and guest experience, exploiting digital initiatives for customer acquisition and retention, and boosting international expansion. The recent share price weakness provides investors with an attractive buying opportunity. Shares currently yield a 2.9 per cent dividend and trade at a forward price-to-earnings multiple of 24 times. The company has a long-term estimated annual growth rate of 11 to 12 per cent, providing investors with an exceptional combination of defensive growth potential and steady income.

PAST PICKS: NOV. 7, 2018

AMAZON (AMZN:UW)

• Then: $1,755.49
• Now: $1,780.78
• Return: 1%
• Total return: 1%

MASTERCARD (MA:UN)

• Then: $208.24
• Now: $268.75
• Return: 29%
• Total return: 30%

ZOETIS (ZTS:UN)

• Then: $95.19
• Now: $122.95
• Return: 29%
• Total return: 30%

Total return average: 20%

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