Full episode: Market Call Tonight for Thursday, December 7, 2017
Stan Wong, director and portfolio manager at Scotia Wealth Management
FOCUS: North American large caps and ETFs
Global equity markets appear to have taken a pause recently. After reaching new heights, equity markets have succumbed to fatigue and overbought technical conditions.
However, the fundamental backdrop for equity markets remains constructive with global economic data expanding and corporate earnings accelerating. As such, we expect the global economic expansion to extend through 2018 and to moderately lift global equity markets to new highs.
Of course, we anticipate more risks (and volatility) ahead as investors navigate central bank tightening measures, elevated stock valuations and potential further geopolitical distractions. In our view, taking advantage of any temporary sell-offs and ‘buying the dips’ would remain a prudent strategy.
Over the near-term, a final tax reform bill in the U.S. could provide an additional catalyst to stock prices as proposed corporate tax cuts would augment corporate earnings. In addition, we are currently in a seasonally stronger part of the calendar with the potential for a proverbial Santa Claus rally this month. Over the last 20 years, the S&P 500 has returned an average of +1.27 per cent for the December month and has been positive 15 of 20 occurrences.
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 favour high-quality stocks and expect dividend growers to outperform dividend payers. Our portfolios are balanced between growth and value stocks, but we expect value stocks to eventually outpace growth stocks over the intermediate term as interest rates move higher.
We continue to add to international and emerging market equities as we expect these positions to generally outperform North American equity markets based on relative valuation metrics and economic growth expectations.
Lastly, we note that correlation, the tendency of stocks to move up and down in lockstep, has a hit a post-financial crisis low. We expect that correlations between stocks and stock sectors will persistently trend lower while the dispersion of returns increases, creating more ‘winners and losers’ amongst stocks and stock sectors. In such an environment, we expect active management investment strategies will outperform passive strategies.
Facebook is the world’s largest online social network with over two billion active monthly users – doubling its one billion users just five years ago. Its ecosystem consists mainly of the Facebook application, Instagram, Messenger, WhatsApp, and many features surrounding these products. With more users and usage time than any other social network, Facebook provides the largest audience and the most valuable data for advertisers. FB’s ad revenue per user is growing, demonstrating the value that advertisers see in working with the platform. The pullback in the stock price from recent highs represents an attractive opportunity to accumulate shares of this unique technology leader. Facebook’s valuation remains compelling with the shares trading at a forward price-earnings multiple of 24x, which is near a historical low. The company is projected to deliver a remarkable long-term earnings per share (EPS) compound annual growth rate (CAGR) of over 25 per cent. Last bought this month at ~US$172.
ING GROEP (ING.N)
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 economic upturn and corporate profits recovery. The bank’s recent restructuring and divestiture of its insurance businesses will allow management to focus on improving its banking operations going forward. There is the ING Direct model as well, which provides a robust digital banking platform and 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 an expected dividend yield of over 4 per cent. Last bought in June 2017 at ~US$17.
VANGUARD FTSE EMERGING MARKETS ETF (VWO.US)
The Vanguard FTSE Emerging Markets ETF offers broad, market-cap weighted exposure to stocks of companies located in developing markets around the world including China, Taiwan, India, Brazil and South Africa. Economic reforms leading to higher profitability, synchronized global growth fueling improved demand and attractive valuations support companies in the emerging markets. Prior to their recent gains, emerging market equities had underperformed developed markets for five years. Today, the EM index currently trades at a forward price-multiple of 14.8x – a 25 per cent discount to the S&P 500’s valuation. Longer term, EM equities will be supported by strong demographics, rising incomes and strong relative economic growth. Top holdings in the Vanguard FTSE Emerging Markets ETF include Alibaba Group, Tencent Holdings and Taiwan Semiconductor. Last bought this month at ~US$44.
PAST PICKS: NOVEMBER 18, 2016
MANULIFE FINANCIAL (MFC.TO)
- Then: $22.95
- Now: $26.90
- Return: 17.21%
- Total return: 21.12%
- Then: $121.99
- Now: $102.52
- Return: -15.94%
- Total return: -15.94%
VANGUARD FINANCIALS ETF (VFH.US)
- Then: $56.45
- Now: $69.93
- Return: 23.89%
- Total return: 25.86%
TOTAL RETURN AVERAGE: 10.34%