Full episode: Market Call Tonight for Thursday, October 12, 2017
Stan Wong, director and portfolio manager at Scotia Wealth Management
FOCUS: North American Large Caps and ETFs
As we make our way into the final months of the year, global equity markets continue to grind higher with U.S. equities in particular reaching new heights. Investor sentiment has clearly turned more positive driven by the increasing breadth of the global economic expansion and expectations of sustained corporate earnings growth. Indeed, the head of the International Monetary Fund (IMF) said last week that "the long-awaited global recovery is taking root" and that three-quarters of the globe is enjoying an economic upswing in "the broadest-based acceleration since the start of the decade". A ‘Goldilocks’ backdrop of improving global economic growth and modest inflation should allow central banks to raise interest rates gradually, allowing for an extended period of economic growth and stronger corporate earnings.
From a technical perspective, equity markets do appear overbought and a pause may be in order over the near-term. Volatility could potentially climb from the extremely low current levels due to the theater of further U.S./North Korea geopolitical tensions or more strife in Washington. However, positive seasonal trends and optimism surrounding potential tax reform in the U.S. may keep any periods of market consolidation short-lived. Taking advantage of any temporary equity sell-offs and ‘buying the dips’ would seem to remain a prudent strategy as global economic data and corporate earnings improves.
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. 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. An active stock-picking strategy is best-positioned to benefit in this environment.
ALIBABA (BABA.N) - Last bought in September 2017 at US$172
Alibaba is the world’s largest online and mobile commerce company, measured by gross merchandise volume. The company operates China’s most popular online marketplaces, including AliExpress, Taobao and Tmall.com. Alibaba’s businesses are comprised of core commerce, digital media and entertainment, and cloud computing. It’s business model has been helped by several factors, its core location of China arguably being most important. With over 560 million Internet users spending 20 hours online per week, China is by far the largest Internet market in the world – double the size of the U.S. market. Over the long run, Alibaba is well-positioned to boost revenues related to digital content, entertainment, cloud computing and overseas markets. Today, Alibaba trades at a forward price-earnings multiple of 31 times and has an estimated long-term earnings growth rate of 25 per cent.
CITIGROUP (C.N) - Last bought in June 2017 at US$61
Citigroup is a diversified financial services holding company providing a broad range of financial services to consumer and corporate customers in over 160 countries. Over the intermediate term, Citigroup shares look to benefit from tighter monetary policy, potential tax reform and a lighter regulatory environment. The bank’s substantial shareholder capital return expectations also make the shares attractive. In June, the company announced plans to repurchase up to US$15.6 billion of common stock over the next year and double its quarterly dividend to 32 cents per share. Longer term, Citigroup's global presence differentiates the bank from nearly all of its peers. With over 40 per cent of its revenues coming from emerging markets, Citigroup is more leveraged to the rise of Asia and Latin America than its main competitors. Today, Citigroup’s valuation continues to look attractive with a dividend yield of 1.7 per cent and a price-to-book ratio of 0.97 times, a notable discount to its peer group.
NORWEGIAN CRUISE LINE (NCLH.O) - Last bought October 2017 at US$57
Norwegian Cruise Line Holdings is the world's third-largest cruise company by berths, operating a fleet of twenty-five ships across three brands (Norwegian, Oceania, and Regent). The company aims to introduce seven additional ships through 2025, increasing capacity faster than its peers and expanding its brand globally. Today, Norwegian sails to more than 510 destinations worldwide. NCLH is well-positioned to benefit from a strengthening global economy, stable fuel costs and positive demographics with the baby boomer generation entering retirement. Moreover, Norwegian's freestyle cruising concept delivers a differentiated product, catering to an older demographic taking families on holiday (cross-generational travel) and millennials seeking more flexible itineraries. Norwegian shares currently trade at a forward price-earnings multiple of 14 times and an estimated long-term earnings growth rate of 21 per cent. NCLH will join the large-cap S&P 500 Index this month, replacing Level 3 Communications Inc.
PAST PICKS: August 26, 2016
AMERICAN EXPRESS (AXP.N)
- Then: $64.79
- Now: $91.53
- Return: 41.27%
- Total return: 44.24%
MORGAN STANLEY (MS.N)
- Then: $31.16
- Now: $48.53
- Return: 55.74%
- Total return: 58.94%
VANGUARD U.S. DIVIDEND APPRECIATION INDEX ETF (VGG.TO)
- Then: $37.67
- Now: $40.76
- Return: 8.20%
- Total return: 9.99%
TOTAL AVERAGE RETURN: 37.72%