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

MARKET OUTLOOK

After struggling in August, the S&P 500 now finds itself less than 2 per cent away from recording new all-time highs. News that the U.S. and China have agreed to hold high-level trade talks in early October has unwound much of skepticism surrounding stocks. Further expectations of a more dovish Federal Reserve Bank have also buoyed the equity markets. The U.S. economic expansion now stands at 123 months, the longest in American history. With fiscal and monetary policy remaining accommodative, we could see the U.S. growth continue to follow a slow burn, extended cycle path. According to Bloomberg consensus forecasts, U.S. GDP growth is currently expected to come in at 2.3 per cent for 2019 and 1.8 per cent for 2020. 

Of course, the investment landscape for equities includes a number of potential risks. The trade war, falling bond yields, weakening manufacturing and geopolitical unrest in Hong Kong and the U.K. are some of the primary concerns. While equities could grind higher, the path could be punctuated with periods of negative volatility. We still see selective opportunities, but recommend investors approach equities cautiously.  

In Stan Wong Managed Portfolios, we continue to overweight U.S. equities over Canadian equities. We have turned neutral to the Asia Pacific region given the prolonged U.S.-China trade dispute. Lastly, we currently have no exposure to the troubled eurozone region. 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 prefer a growth over value approach, but would stay with defensive growth opportunities. Low beta and high dividend approaches should also outperform given the current late-cycle, low interest rate backdrop. Lastly, we continue to advocate an active approach and emphasize prudent stock and sector allocation.

TOP PICKS

AMERICAN TOWER CORP (AMT:UN)
Last bought this month at around US$216.

American Tower owns, operates, and develops wireless communications and broadcast towers globally. Data consumption in the U.S. has been growing 30 to 40 per cent yearly. This pace is expected to continue due to rising video content and the looming upgrade to 5G networks. In international markets, wireless networks are a decade behind the U.S. and will require massive investment. Telecom carriers will need to continue investing in their networks, providing American Tower with a highly visible and stable revenue stream. Over the past five years, it’s grown its revenue by over 14 per cent yearly. Shares currently trade at 22 times EV/EBITDA, a valuation near its 10-year historical mean. The shares also pay a distribution yield of 1.7 per cent.

MERCK & CO INC (MRK:UN)
Last bought this month at around US$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. Its 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 11 to 12 per cent. The shares also yield a healthy 2.7 per cent dividend.

MATCH GROUP INC (MTCH:UW)
Last bought this month at around US$75.

Match Group operates subscription-based online dating websites and applications and is the dominant leader in the industry with over US$2.1 billion in expected revenues for 2019. The company generates revenue roughly equally from the U.S. and international markets. Match owns the top 4 most popular online dating brands in North America. Online dating has become more mainstream, with 19 per cent of couples meeting online, surpassing those that have met through a friend (17 per cent). With the declining stigma of online dating, a rising number of internet and mobile users and growth of the singles population worldwide, Match shares offer investors a strong secular growth story. Match trades at 42 times forecast earnings, with a long-term estimated earnings growth rate of 17 per cent.

PAST PICKS: SEP. 12, 2018

HERSHEY CO. (HSY:UNN)

• Then: $106.02
• Now: $151.15
• Return: 43%
• Total return: 46%

VISA (V:UN)

• Then: $146.57
• Now: $174.98
• Return: 19%
• Total return: 20%

ZOETIS (ZTS:UN)

• Then: $88.79
• Now: $120.70
• Return: 36%
• Total return: 37%

Total return average: 34%

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