Stan Wong, portfolio manager at Scotia Wealth Management

FOCUS: North American Large Caps and ETFs

MARKET OUTLOOK:

Global equity markets continue to rally in 2023 with the MSCI World Index up over 18 per cent since the October 2022 lows. At The Stan Wong Group, we take a constructive view for 2023 as many market concerns appear to be ebbing. The market’s primary worry, inflation, is quickly diminishing. Prices for many commodities including oil, natural gas, gasoline, aluminum, lumber and wheat have retreated sharply from their highs last year. Indeed, the Bloomberg Commodity Index is now down over 20 per cent from last year’s highs. As well, housing and used car prices appear to have peaked. Cooling inflation pressures should allow central banks around the world to pause their rate hiking cycle later this year and pivot to a more dovish tone. Since 1950, we note that in instances where inflation is lower than the previous year, the S&P 500 Index has returned an average of 12.6 per cent with a win (positive return) ratio of nearly 75 per cent.

From a macroeconomic perspective, China’s recent withdrawal from it’s zero-COVID policy should allow for a meaningful recovery in the world’s second largest economy and a catalyst for many industries globally. Moreover, the increasing odds of a soft landing in the U.S. bodes well for equities, as does the avoidance of an energy crisis in Europe. From a technical view, market breadth has been progressively improving with 70 per cent of the constituents in the S&P 500 Index now trading above their respective 200-day moving averages (from a 12 per cent low last September). We further observe that back-to-back down years for equity markets are historically rare. Since 1950, the S&P 500 Index has only seen consecutive calendar years of negative returns three times. Adding to this, the third year of the presidential cycle has historically been the most robust, with an average return of 16.8 per cent for the S&P 500 Index since 1950 and a win (positive return) ratio of nearly 90 per cent.

In Stan Wong managed portfolios, we continue to prefer value stocks above growth stocks. Global value equity indices have been outpacing global growth indices since late 2021. The energy, financial and health-care sectors represent our highest sector weightings. Select names in the consumer discretionary area also look attractive, particularly with inflation cooling and the anticipated resurgence of the Chinese consumer. While we are currently overweight on U.S. and Canadian equity markets, we see a path for international equities to build momentum ahead. Generally, valuations in European and Asian equity markets look more attractive relative to North American equity markets. In our fixed income allocation, we most favour investment grade corporate bonds.

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TOP PICKS:

MERCEDES-BENZ GROUP AG (MBGYY OTC)

Mercedes-Benz, formerly Daimler AG, is one of the world’s leading manufacturers of premium and luxury cars and vans. Mercedes-Benz is a clear global leader in luxury automobiles and product innovation, selling its vehicles and services in nearly every country across the globe. The company has about €150 billion in forecasted fiscal year 2023 revenue. Europe represents the largest revenue source at over 35 per cent of total sales while Asia sits next at over 28 per cent. Near-term, improving supply chains and the revival of the consumer in China could boost the share price. Longer-term, the company’s continued push into the battery electric vehicle (BEV) category could drive greater sales and eventually challenge Tesla’s dominance. Today, BEVs account for about 6 per cent of total vehicles sales to Mercedes-Benz retail customers. By 2030, management aspires to sell only battery electric vehicles, representing a 40 per cent growth rate in the category. Mercedes-Benz stock provides compelling value, trading at 6x earnings – a significant discount to historical averages. From a relative strength perspective, the shares have been outpacing the broader MSCI World Index since early-2020.The Company reports its next quarterly results on February 17th.

STARBUCKS (SBUX NASD)

Starbucks is one of the world’s most widely recognized restaurant brands, operating more than 36,000 stores across 80 countries. With almost US$36 billion in expected revenues this year, Starbucks operates in three segments: North America, international markets, and channel development (grocery and ready-to-drink beverages). The coffee chain generates revenue from company-operated stores, royalties, sales of equipment and products to licensed partners, ready-to-drink beverages, packaged coffee, and single-serve products. Earlier this month, management reaffirmed its financial forecasts for the fiscal year. Over the next few years, management aims to return US$20 billion to shareholders in the form of dividend increases and share buybacks. With China’s economic reopening, sales should get a significant lift from increased traffic in the company’s second largest market. By 2025, Starbucks plans to operate 9,000 stores in China (from 6,090 stores today) and long-term will benefit from the country’s growing middle class. From a relative strength perspective, Starbucks shares have been outpacing the broader S&P 500 Index since May 2022. The shares currently yield a 1.9 per cent dividend and the Company reports its next quarterly results on May 2.

WALT DISNEY (DIS NYSE)

With over US$90 billion in expected fiscal 2023 revenues, Walt Disney is one of the largest and most recognized media and entertainment companies on the globe. Disney is quickly gaining market share in its direct-to-consumer streaming segment. It’s combined streaming subscriber count, when combining Disney+, Hulu and ESPN+ is now nearly 235 million subscribers, surpassing that of its rival, Netflix. Disney’s parks and resorts segment is expected to continue its strong rebound with pandemic lockdowns in China ending and intensifying broader global demand for travel. The studio segment’s future looks strong with a robust slate of content ahead. Lastly, the return of CEO Bob Iger and his recently announced reorganization plans could also mean more upside for the stock price. Disney shares are down more than 45 per cent from its March 2021 highs, providing compelling value for astute investors. The company reports its next quarterly results on May 11th.

Past Picks: February 24, 2022

MANULIFE FINANCIAL (MFC TSX)

Then: $25.44
Now: $26.20
Return: 3%
Total Return: 7%

SHELL PLC (SHEL NYSE)

Then: $51.59
Now: $62.55
Return: 21%
Total Return: 25%

VANGUARD GLOBAL VALUE ETF (VVL TSX)

Then: $40.53
Now: $43.10
Return: 6%
Total Return: 9%

Total Return Average: 14%