Stan Wong, director and portfolio manager at Scotia Wealth Management

Focus: North American large caps and ETFs
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MARKET OUTLOOK
As we celebrate the eighth anniversary of the bull market on March 9, North American stock prices have continued to advance higher with investors taking a “glass is half full” perspective. Against the backdrop of an improving global economy and optimism over President Trump’s pro-growth and business-friendly policies, market participants have pushed the S&P 500 Index valuation to a forward P/E of nearly 18x — a level not seen since 2002. At home, the TSX’s valuation also looks stretched with a forward P/E of almost 17x. Indeed, a healthy consolidation or pause is very possible (and welcome) in the near term given the particularly strong equity market gains since the U.S. presidential election.

Nevertheless, we have a constructive view toward the U.S. (and global) economy and believe we are moving from a deflationary environment to a reflationary phase. We also appear to be shifting from an equity market driven by interest rate moves to one driven by corporate earnings. Since bond yields bottomed and inflation began to rebound in mid-2016, we note that there has been a significant rotation from perceived “safe assets” (defensive equities, government bonds and precious metals) to “risk assets” (cyclical equities, high-yield bonds and base metals). From a portfolio construction perspective, we expect this trend to continue over the intermediate term. Of course, the global economy needs to continue moving in the right direction and corporate earnings need to move higher for this overall thesis to play out.

In Stan Wong Managed Portfolios, we favour more cyclical equity sectors (financials, technology and industrials) over the more defensive, yield-oriented equity sectors (consumer staples, real estate and utilities). As the Federal Reserve embarks on a path of tighter monetary policy, value stocks should outperform growth stocks while dividend growers should outpace dividend payers. We prefer U.S. equities (and the U.S. dollar) over Canadian equities. Outside of North America, certain international equity markets are beginning to look attractive to us from a relative valuation perspective.

TOP PICKS

CITIGROUP (C.N) – Last bought in September 2016 at ~US$48
Citigroup is a diversified financial services holding company that provides a broad range of financial services to consumer and corporate customers in over 160 countries. In the intermediate term, Citigroup shares look to benefit from rising interest rates and a lighter regulatory environment. Citigroup’s potential for large capital returns also makes the shares attractive. Indeed, the company recently announced a $1.75-billion increase to its share buyback program in November 2016. Citigroup’s recent co-branding deal with Costco (in the U.S.) has fared very well and should add to earnings results. Longer term, Citigroup is particularly leveraged to the rise of the emerging markets — a distinct advantage to some of its competitors. Lastly, the stock’s valuation looks compelling with a price-to-book ratio of 0.83x, a discount to its peer group.

SUN LIFE FINANCIAL (SLF.TO) – Last bought this month at ~$49
Sun Life Financial is a diversified financial services company providing wealth accumulation and protection products to customers around the world. With over 40 per cent of its revenues coming from the U.S., Sun Life should benefit from proposed deregulation and tax reform policies south of the border. Rising interest rates should also push SLF shares higher. Longer term, Sun Life will benefit from aging demographics demanding more financial wealth and protection products. SLF shares look compelling with a 3.4 per cent dividend yield, which is expected to grow by about 10 per cent on average per year over the intermediate term. Valuation is attractive with the shares trading at a 12x forward price-earnings multiple and a 1.5x price-to-book ratio.     

MGM RESORTS INTERNATIONAL (MGM.N) – Last bought this month at ~US$25
MGM Resorts International operates gaming, hospitality and entertainment resorts primarily in the U.S. (mostly Las Vegas), China and Dubai. Notable brands include MGM Grand, The Mirage and Bellagio. With a softer quarter reported recently, MGM shares have fallen to an attractive level. From a macro perspective, a recovering global economy should help properties both in the U.S. and China. MGM shares trade at 10x EV/EBITDA — a discount to its main competitors Las Vegas Sands Corp. and Wynn Resorts Ltd.
 

PAST PICKS: JANUARY 14, 2016

FACEBOOK (FB.O)

• 25x FPE; 25 per cent LTG
• Strong growth in Instagram and video boosting revenue
• Future revenue catalysts include WhatsApp, Messenger and virtual reality
   
• Then: $98.37
• Now: $138.24
• Return: +40.53%
• TR: +40.53%

NIKE (NKE.N)

• 23x FPE; 11 to 12 per cent LTG
• Success depends on ability to accelerate footwear and apparel sales internationally while protecting their basketball market
• Challenging environment: intensified competition and liquidation of several sporting goods retailers (Sports Authority in 2016)
   
• Then: $58.51
• Now: $56.36
• Return: -3.67%
• TR: -2.22%

VISA (V.N)

• 26x FPE; 17 per cent LTG
• Secular global shift to electronic payments
• Acquisition of Visa Europe and Costco in the U.S. will help push 2017 metrics
   
• Then: $73.80
• Now: $89.11
• Return: +20.74%
• TR: +21.88%

TOTAL RETURN AVERAGE: +20%