Market Call Tonight for Thursday, August 24, 2017
Stan Wong, director and portfolio manager at Scotia Wealth Management
Focus: North American large caps and ETFs
As we approach the end of summer, U.S. equity markets have recently stalled amidst geopolitical tensions and White House turmoil. Yet, fundamentals such as positive economic data and solid corporate earnings have largely been overshadowed by the negative political headlines. While valuations remain somewhat extended, continued corporate earnings growth and positive economic news globally should help push stocks higher. Should the White House at some point be successful in passing its much-anticipated tax reform and deregulation policies, this would further rally U.S. equities higher.
In Canada, the TSX continues to be a laggard with energy prices remaining weak and the softening housing market casting an uncertain shadow on the economy. The precarious outcome of the NAFTA renegotiations has also caused some uncertainty for Canadian equity investors. Going forward, we will need to see signs of a countertrend rally in energy prices, clarity surrounding future trade with the U.S. and data that indicates a more balanced housing market for the TSX to reverse course and move higher.
When looking at international markets, economic and market data continue to improve in all major regions. In Europe, we are seeing accelerating economic expansion and a steady earnings outlook. In Asia, the region’s backdrop appears encouraging with China and Japan still indicating solid economic growth and improved corporate earnings. Lastly, the emerging markets look attractive with economic reforms, stronger corporate fundamentals and reasonable valuations supportive of equity prices. Indeed, international equity markets (with lower price-earnings and price-to-book multiples and higher dividend yields) currently appear more compelling than North American equity markets from a valuation screen.
In Stan Wong Managed Portfolios, we are overweight in the financials, technology and consumer discretionary sectors while underweight defensive areas such as utilities, real estate and consumer staples. We also generally favour high-quality stocks and expect dividend growers to outperform dividend payers. We are balanced between growth and value stocks but expect value stocks to eventually outpace growth stocks over the intermediate term as interest rates move higher. We continue to add to international equity markets as we expect these positions to generally outperform North American equity markets based on relative valuation metrics. As expected, we have seen an uptick in market volatility lately and expect it to remain elevated moving forward. This will provide us with buying opportunities as we believe that the strategy of “buying on the dips” remains prudent.
ING GROEP (ING.N) – Last bought in June 2017 at approximately US$17
ING Groep is a global financial institution with a strong European base, offering retail and commercial banking services to customers in over 40 countries. Broadly speaking, Eurozone banks are benefiting from the region’s upturn in economic growth and recovery in corporate profits. The bank’s recent restructuring and divestiture of its insurance businesses will allow management to focus on improving its banking operations going forward. As well, the ING Direct model, which provides an online and mobile banking platform, is compelling because of its low operating costs and expected ongoing success with the increasingly influential millennial demographic. ING’s valuation looks attractive with a price-to-book ratio of 1.2x and a dividend yield of over 4.0 per cent.
UNITED TECHNOLOGIES (UTX.N) – Last bought in September 2016 at approximately US$100
United Technologies Corp. provides technology products and support systems to worldwide customers in the aerospace, defence and building industries. The company’s products include aircraft engines, elevators and escalators, climate-control equipment and aerospace systems. United Technologies has a strong collection of franchises with industry-leading positions and profitability in markets with attractive secular growth prospects (buildings/aircraft). Along with a well-diversified set of businesses, UTX’s revenue is diversified by geography with nearly 50 per cent of its sales coming from international markets. In addition, over 45 per cent of United Technologies’ revenue comes from high-margin recurring aftermarket services, providing a reliable and predictable cash flow. Recent activist shareholder buying of UTX shares has put pressure on management and a potential future breakup of the conglomerate would certainly unlock shareholder value. UTX currently trades at a 17x forward price-earnings multiple and pays a 2.4 per cent dividend yield.
VANGUARD FTSE EMERGING MARKETS FUND ETF (VWO) – Last bought in October 2016 at approximately US$38
The Vanguard FTSE Emerging Markets ETF offers broad, market-cap-weighted exposure to stocks of companies located in emerging markets around world including China, Brazil, Taiwan and South Africa. The ETF’s objective is to closely track the return of the FTSE Emerging Markets All Cap China A Inclusion Index. Current economic reforms, improving corporate fundamentals and attractive relative valuations provide support for EM stocks. This EM index currently trades at a 14x price-earnings multiple, 1.75x price-to-book and a 2.7 per cent dividend yield — a significant valuation discount to the S&P 500 Index trading at a 21x price-earnings multiple, 3.1x price-to-book and a 2.0 per cent dividend yield. Longer term, emerging market equities will be supported by strong demographics, rising incomes and strong relative economic growth. Top holdings in the Vanguard FTSE Emerging Markets ETF include Tencent Holdings, Taiwan Semiconductor and China Mobile.
PAST PICKS: JUNE 23, 2016
- Then: $61.31
- Now: $72.11
- Return: 17.61%
- Total return: 23.30%
- Then: $51.91
- Now: $72.69
- Return: 40.03%
- Total return: 44.26%
PEMBINA PIPELINE (PPL.TO)
- Then: $38.90
- Now: $39.98
- Return: 2.77%
- Total return: 8.60%
TOTAL RETURN AVERAGE: 25.38%