Stan Wong, Director & Portfolio Manager at Scotia Wealth Management
FOCUS: North American Large Caps and ETFs
As we approach the inauguration of President-Elect Trump, North American equity markets continue to be buoyed by optimism of a more pro-growth, equity-friendly political environment. Since the November election, equity markets have pushed higher with expectations that Trump will deliver a legislative agenda of corporate tax reform, infrastructure spending and deregulation. In addition, recent improving economic data in the U.S. and around the world has also helped equities advance higher. However, some market consolidation or pause in the near-term should not be surprising given the recent strong equity market gains.
Since the election, we note that there has been a significant rotation from perceived “safe assets” (defensive equities, government bonds and gold) to “risk-on assets” (cyclical equities, high yield bonds and energy/base metal commodities). We expect this trend to continue over the medium term as we favour the more cyclical equity sectors (financials and industrials) over the more defensive, yield-oriented equity sectors (consumer staples, real estate and utilities). From a fundamental perspective, we generally expect value stocks to outperform growth stocks as higher discount rates will cause investors to be more mindful of the price they pay for a dollar’s worth of future corporate earnings. In addition, we like dividend growers over dividend payers. Geographically, we prefer U.S. equities (and the U.S. dollar) over Canadian equities. Several international equity markets look attractive from a valuation perspective as well.
While reflationary measures in the U.S. and improving economic growth around the world should help equities in 2017, we also acknowledge that the markets face several volatility risks:
- Rising interest rates and a less accommodative U.S. Federal Reserve Bank could cause market anxiety and volatility levels to move higher.
- Equity market valuations appear elevated and could present market risks if corporate earnings in the next several quarters are not as strong as anticipated.
- Policy disappointments or excessive protectionist measures from Trump could deflate investor optimism and cause market turbulence to rise.
On balance, we think that the positives for equities outweigh the risks. The fundamentals of improving corporate profits and better economic growth suggest that stocks look more attractive than bonds or cash. As well, fiscal stimulus measures globally should help support economic activity as monetary stimulus measures fade. In 2017, we will likely see more market volatility than in previous years however. In Stan Wong Managed Portfolios, we continue to firmly believe that an active portfolio management strategy with tactical stock selection and defensive risk controls (including stop loss strategies) is essential to investment portfolio success.
Metlife Inc. (MET.N); last bought this month at ~US$53;
Metlife is one of the largest financial services companies in the U.S., and the largest U.S. life insurer. Longer-term, Metlife benefits from a strong global brand, a solid financial balance sheet and a large distribution network. From a macro perspective, rising interest rates and an easing of the regulatory environment should help push MET shares higher over the medium term. In November, MET announced a shareholder-friendly $3 billion share repurchase program that aims to be completed by the end of this year. Metlife shares appear undervalued – currently trading at a forward price-earnings multiple of 10x and a price-to-book ratio of 0.80x, a discount to its peer group on both metrics. In addition, MET shares currently pay an attractive 2.9 per cent dividend yield (which is expected to grow by about 10 per cent per year over the next few years).
United Technologies Corp. (UTX.N); last bought in September 2016 at ~US$100;
United Technologies Corp. provides technology products and support systems to worldwide customers in the aerospace, defense and building industries. The company’s products include aircraft engines, elevators and escalators, climate control equipment and aerospace systems.
United Technologies has been shareholder friendly, consistently increasing their dividend over the past 10 years and announcing a $12 billion stock buyback plan in October 2015. UTX should benefit from a recovering global economic climate and President-elect Trump’s stated priorities to increase defense and infrastructure spending. With its diversified business lines and global reach, UTX shares are attractively valued, trading at a 17x forward price-earnings multiple and a long-term estimated earnings per share (EPS) compound annual growth rate (CAGR) of about 10 per cent. UTX shares currently pay a 2.4 per cent dividend yield which is expected to grow solidly over the new few years.
Vanguard Global Value Factor ETF (VVL.TO); last bought in December 2016 at ~C$30;
The Vanguard Global Value Factor ETF uses an actively-managed, quantitative and rules-based approach that aims to select global equities exhibiting value characteristics. The fundamental measures used include price-to-book, price-to-earnings, estimated earnings and operating cash flow. The ETF currently carries a large weighting in the U.S. financials sector, a sector considered to be greatly undervalued. Over the past six months, the Vanguard Global Value Factor ETF has handily outperformed its global equity benchmark (FTSE Developed All Cap Index) by over 10 per cent.
Past Picks: DECEMBER 3, 2015
- Then: $66.30
- Now: $69.80
- Return: +5.27%
- TR: +7.24%
Electronic Arts (EA.O)
- Then: $67.22
- Now: $80.35
- Return: +19.53%
- TR: +19.53%
General Dynamics (GD.N)
- Then: $141.96
- Now: $177.89
- Return: $177.89
- TR: +28.04%
Total Return Average: +18.27%