Nov 18, 2016

Stan Wong's Top Picks: November 18, 2016

BNN Bloomberg

Stan Wong , BNN

Stan Wong, director and portfolio manager at Scotia Wealth Management

Focus: North American large caps and ETFs
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MARKET OUTLOOK
In the aftermath of Trump’s surprising U.S. presidential election victory, investors appear to be optimistic of a more pro-growth, equity-friendly political environment. North American equity markets have pushed higher with expectations that President-elect Trump will focus more on initiatives such as corporate tax reform, infrastructure spending and deregulation, and less on issues like immigration and trade reform. In particular, there has been a significant rotation from the more defensive, yield-oriented equity sectors (consumer staples, real estate and utilities) to the more cyclical equity sectors (financials and industrials) since Trump’s win.

While the market moves since the election appears somewhat overdone, we expect the outperformance trend of the more economically-sensitive equity sectors to continue over the medium term under a newly-unified (White House and Congress) Republican administration. Against the backdrop of a reflationary theme and improving economic fundamentals, we also expect to see further upward pressure on bond interest rate yields and additional U.S. dollar strength. Of course, there is still a lack of clarity and details accompanying Trump’s policies at this point. Indeed, this may cause volatility levels to rise in both equity and bond markets in the coming months. As an aside, we do not expect the Fed’s almost certain interest rate hike in mid-December to cause very much market disruption. From our perspective, any upcoming bouts of market turbulence in the coming months should be viewed as opportunities to put cash to work.

In Stan Wong Managed Portfolios, we generally expect cyclical and value equities to outperform. Our preferred equity sectors include financials, industrials, energy and health care (biotech and pharma) – all beneficiaries under President-elect Trump’s mandate. At the moment, we are holding slightly higher levels of cash as we have sold into the “Trump bump” rally. We intend to redeploy this cash as the markets cool down and other opportunities arise. Longer term, 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.

TOP PICKS

MANULIFE FINANCIAL CORP. (MFC.TO)
Manulife is one of the world’s largest life insurers, evolving over the years through organic growth and a series of successful acquisitions. Manulife’s size, scale and distribution capabilities provide it with a competitive advantage over its peers. As well, the company’s sizable exposure to the faster-growing insurance markets in Asia (over 40 per cent of Manulife revenues) is viewed very favorably. In Canada, Manulife’s recent acquisition of Standard Life’s Canadian unit should broaden its product offerings. From a macro perspective, rising interest rates and steady equity markets should help push Manulife shares higher. MFC shares currently trade at a forward price-earnings multiple of 11x and pay a solid 3.2 per cent dividend yield (which is expected to grow by about 10 per cent per year over the next few years).

CELGENE CORP. (CELG.O)
Celgene is a biopharmaceutical company focusing on the discovery, development and commercialization of therapies designed to treat cancer and other severe, immune, inflammatory conditions. CELG continues to have strong growth prospects and should benefit from aging demographics longer-term. Celgene’s therapy pipeline is very robust allowing for further diversification of its revenue stream over the next several years. Indeed, the company has set a growth plan to more than double their sales to more than US$21 billion by 2020. With the “Hillary Clinton overhang” now a non-issue, CELG shares look compelling trading at a 18x forward price-earnings multiple with a long-term projected earnings per share (EPS) compound annual earnings growth rate (CAGR) of over 20 per cent. With a PEG (price-earnings to growth) ratio below 1.0x, CELG shares are trading well below its peers.

VANGUARD FINANCIALS ETF (VFH)
The Vanguard Financials ETF seeks to track a basket of stocks in the U.S. financial sector. Top holdings include JPMorgan Chase, Berkshire Hathaway, Bank of America, Citigroup and Goldman Sachs. With improving economic fundamentals and rising interest rate yields, U.S. financials should perform well going forward. Financials may also see some benefit from declining regulatory scrutiny under President-elect Trump, and the potential for a repeal or amendment of the Dodd-Frank Act. The Vanguard Financials ETF pays a dividend yield of about two per cent and carries a very attractive expense ratio of only 0.10 per cent.