Stan Wong, portfolio manager, Scotia Wealth Management

FOCUS: North American large caps and ETFs 

MARKET OUTLOOK:

Unquestionably, 2022 presented a very challenging environment as a perfect storm (Russia-Ukraine war, soaring inflation, hawkish central banks and China’s zero-COVID-19 policy) resulted in one of the toughest calendar years for equity and bond investors alike. At The Stan Wong Group, we take a constructive view for 2023 and see many elements of the storm receding this year. Inflation, the market’s primary angst is quickly cooling. Prices for a wide range of commodities including oil, natural gas, gasoline, aluminum, lumber and wheat have retreated sharply from their highs last year. Housing and used car prices also appear to have peaked. Easing inflation pressures should allow central banks to pause the rate hiking cycle this year and pivot to a more dovish tone. Lastly, China’s departure from its zero-COVID-19 policy and economic reopening should provide a meaningful catalyst for many global industries. 

We further note that consecutive negative calendar years for equity markets are historically rare. Since 1950, down calendar years for the S&P 500 Index have been followed by a positive calendar year performance 80 per cent of the time with an average return of 15 per cent. 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. Lastly, we see market breadth improving with seven sectors (of 11 ) in the S&P 500 Index trading above their respective 200-day moving averages.

In Stan Wong Managed Portfolios, we continue to favour value stocks over growth stocks. Indeed, global value indices have been outpacing global growth indices since late 2021. The energy, health care and financial sectors represent our highest sector weightings while the technology and communications sectors remain decidedly underweight. Furthermore, selective names in the consumer discretionary sector are beginning to look attractive, particularly with inflation cooling and the expected revival of the Chinese consumer. While we are currently overweight U.S. and Canadian equity markets, we see a path for international equities to gather momentum ahead. In our fixed-income allocation, we favour investment-grade corporate bonds and inflation-protected bonds. Overall, we expect equity and fixed income both to regain their footing this year.  

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TOP PICKS:

ISHARES GLOBAL FINANCIALS ETF (IXG NYSEARCA)

Last bought in December at ~US$68

The iShares Global Financials ETF provides exposure to a basket of global financial companies including diversified banks, investment banks, asset managers and insurers. The ETF seeks investment results that correspond to the performance of the S&P Global Financials Index. With the global macroeconomic landscape expected to improve this year (waning inflation, more dovish central banks and a reopening Chinese economy), global financial stocks should perform well. Notably, the IXG ETF has been outpacing the broader MSCI World Index since late 2020. Valuations continue to look attractive for financials from a historical perspective with this portfolio trading at a price-to-book ratio of about 1.25x. Approximately 49 per cent of the ETF is invested in the U.S. and the remainder in international markets. Top holdings in the iShares Global Financials ETF include Berkshire Hathaway, JPMorgan Chase, Bank of America, Wells Fargo and HSBC. The ETF pays a current dividend yield of over three per cent.

LVMH MOET HENNESSY LOUIS VUITTON SE (LVMUY OTC)

Last bought in December at ~US$145

LVMH is a diversified global producer and distributor of luxury goods. The company operates in several distinct business segments including fashion and leather goods, watches and jewelry, wines and spirits, perfumes and cosmetics. Some of LVMH’s prestigious brands include Louis Vuitton, Christian Dior, Givenchy, Tiffany & Co., Fendi, Hennessy Moet, Dom Perignon and Sephora. Over the years, management has executed its acquisition strategy very successfully. Its US$15.8 billion acquisition of Tiffany & Co. in 2021 marked one of the company’s more recent high-profile transactions. Longer-term, we see an attractive growth runway for LVMH given global consumer trends for premium products and the growing middle class in Asia. LVMH operates more than 5,500 stores worldwide and is headquartered in Paris, France. LVMH shares have been outpacing broader equity indices (S&P 500 Index and MSCI World Index) since mid-2016. The company reports its next quarterly results on Jan. 27.

VISA (V NYSE)

Last bought in December at ~US$205

Visa is the world’s leader in digital payments boasting about 3.7 billion credit and other payment cards in circulation across more than 200 countries. The company is expected to gross about US$32 billion in revenue for fiscal year 2023. Last quarter, management announced a new U.S. $12 billion share buyback program along with a 20 per cent dividend increase. With pent-up travel demand surging and China reopening, Visa should benefit from more transactions in the higher-margin cross-border segment. The U.S. consumer also continues to appear resilient with recent retail sales data pushing higher. Today, Visa boasts ample free cash flow, no material debt and is forecasted to have predictable sales and earnings growth for the foreseeable future. Longer-term, the secular trend of electronic payments should have plenty of runway for growth. From a relative strength perspective, Visa shares have been outpacing the broader S&P 500 Index since late 2021. The company reports its next quarterly results on Jan. 26.

PAST PICKS: January 12, 2022

Pfizer (PFE NYSE)

• Then: $56.65
• Now: $46.85
• Return: -17%
• Total Return: -15%

Manulife Financial (MFC TSX)

• Then: $25.79
• Now: $25.29
• Return: -2%
• Total Return: 4%

ProShares Equities for Rising Rates ETF (EQRR NASD)

• Then: $55.19
• Now: $54.20
• Return: -2%
• Total Return: 1%

Total Return Average: -3%