Full episode: Market Call Tonight for Wednesday, September 12, 2018
Stan Wong, director and portfolio manager at Scotia Wealth Management
Focus: North American large and ETFs
As we approach the final quarter of the year, U.S. equities continue to lead both developed and emerging market indexes this year. Last month, the S&P 500 Index broke out to a new all-time high after grinding its way higher from an early year correction. This despite persistent concerns over global trade tensions and fears of emerging market contagion. A strong corporate earnings momentum along with solid economic data (employment and ISM manufacturing report last week) have provided a positive backdrop. However, recent weakness in some technology shares and some of the popular FAANG stocks have caused investors to wonder if the stumble will become more of a tumble moving forward. Indeed, the technology and FAANG trade has become a crowded one and some caution is warranted, particularly where portfolios are overweight these areas.
In Canada, equities have not gained much ground with the TSX being flattish this year. The overhang of NAFTA negotiations, mixed employment data and the pipeline impasse have stalled Canadian stocks. International equities have fared worse, with eurozone equity indexes down mid-single digits on the year. Relatively subdued earnings growth, weak economic momentum and heightened political risks have posed to be significant challenges for eurozone equities this year. Meanwhile, a sell-off in Asian and emerging market equities have pushed several of these markets into bear market territory (down 20 per cent or more from their highs). Despite attractive valuations, investor sentiment towards Asia-Pacific and emerging market equities have soured amid a rising U.S. dollar, falling emerging market currencies and intensifying U.S.-China trade clashes. It should be noted that the U.S. has more “tariff leverage” in its trade conflict with China. According to 2017 U.S. Census bureau data, China had imported US$130 billion of American goods, whereas over US$505 billion of Chinese goods went the other way to the United States.
In Stan Wong Managed Portfolios, we continue to be constructive on the current market environment. Fundamental and technical data points remain encouraging, giving us the perspective that well-selected equities should outperform fixed income and cash investments over the intermediate term. While we expect global trade issues to continue to cause headline risks and occasional bouts of market volatility, we do not expect that it will derail the current bull market or prematurely end the economic expansion. Indeed, it would stand to reason that we should see trade pressures eventually ease since full-scale trade wars are in no country’s best interests. In client portfolios, we continue to be positioned with a relatively high weighting in U.S. equities (and the U.S. dollar) compared to Canadian equities. We have no exposure to European stocks currently and have limited positions in the Asia-Pacific and emerging market areas. Growth, momentum and dividend growth strategies continue to outpace value and high dividend approaches. Stan Wong Managed Portfolios are positioned accordingly as we expect this trend to continue for the intermediate future. Lastly, as the current economic cycle and equity bull market matures, we do anticipate more volatility ahead and stress the importance of stock selectivity and the use of stop-loss strategies.
HERSHEY CO. (HSY.N)
Last bought this month at about US$104.
Hershey is a global confectionery leader with more than 80 brands delivering over US$7.5 billion in annual revenues in about 80 countries. North America accounts for about 88 per cent of Hershey’s total revenues.
Over the past few years, Hershey has focused on expanding its portfolio and diversifying into other snack brands, buying beef jerkymaker Krave in 2015 and Amplify Snack Brands (and its SkinnyPop ready-to-eat popcorn product) earlier this year. In the company’s last earnings report, both earnings and sales estimates were topped, helped largely by the integration of the SkinnyPop brand. Hershey also announced a US$500 million share buyback program and raised its quarterly dividend by 10 per cent. As a consumer staples company with solid growth metrics, Hershey shares provide investors with defensive growth characteristics. Hershey shares currently trade at a forward price-earnings multiple of 19 times, with a forecasted long-term earnings per share growth rate of 9 per cent. Hersheyt yields a 2.8 per cent dividend yield which is forecasted to grow modestly over the next few years. Moreover, the recent move in the share price above its 200-day moving average signals an encouraging technical trend. The company reports its next quarterly results on October 24.
Last bought in July 2018 at about US$131.
Visa dominates the global market for electronic payments, accounting for about half of all credit card transactions and an even higher percentage of debit card transactions. Today, Visa boasts over 3 billion credit and other payment cards in circulation across more than 200 countries. Its network consists of 16,800 financial institutions and 44 million merchants. As consumer spending around the world grows and the secular shift to digital currency and electronic payments continues, Visa should continue to flourish over the long term as an effective toll booth on global consumer spending. Earlier this year, Visa authorized a new $7.5 billion share buyback program, reflective of management’s commitment of returning excess cash to shareholders. Visa shares currently trade at a forward price to earnings multiple of 29 times with a forecasted long-term earnings per share growth rate of about 18 per cent. The company reports its next quarterly results on October 24.
ZOETIS INC (ZTS.N)
Last bought this month at about US$88.
With over US$5.7 billion in revenues, Zoetis is the world’s largest producer of medicine and vaccinations for companion and livestock animals. Zoetis was spun-off from Pfizer’s animal health division in 2013. The company earns more than 55 per cent of its total revenues from livestock/production animals and the remainder from companion animals. In general, the animal health industry has several attractive characteristics, including minimal generic competition and a fragmented customer base that allows for significant pricing power on the companion animal side. On the livestock/production animal side, rising standards of living in developing countries will lead to a wider adoption of meat-heavy diets, driving greater demand for livestock products. Zoetis currently trades at a forward price to earnings multiple of 28 times, with a forecasted long-term earnings per share growth rate of about 18 per cent. Zoetis reports its next quarterly results on November 6.
PAST PICKS: AUG. 24, 2017
ING GROUP (ING.N)
Sold in May 2018.
- Then: $17.77
- Now: $12.65
- Return: -29%
- Total return: -25%
UNITED TECHNOLOGIES GROUP (UTX.N)
Sold in February 2018.
- Then: $115.30
- Now: $133.89
- Return: 16%
- Total return: 19%
VANGUARD FTSE EMERGING MARKETS ETF (VWO.N)
Sold in June 2018.
- Then: $43.83
- Now: $40.28
- Return: -8%
- Total return: -6%
Total return average: -4%