Stan Wong, portfolio manager, Scotia Wealth Management

FOCUS: North American large caps and ETFs 

MARKET OUTLOOK:

Despite recent market turbulence, the S&P 500 Index is now up more than 15 per cent from its October lows. From a technical perspective, equity markets have been remarkably resilient. For nearly six months, equity markets have been on an uptrend, generally marking a path of higher highs and higher lows. Although volatility may persist over the near term, there are several reasons to remain constructive on equities from our view at The Stan Wong Group. Firstly, the market’s primary worry, inflation, has been subsiding. In the U.S., year-over-year inflation has now cooled for eight consecutive months. Tightening financial conditions combined with easing inflation could allow central banks to pivot to a more dovish tone this year. Moreover, China’s economic re-opening and withdrawal from its zero-COVID-19 policy should allow for a meaningful recovery in the world’s second-largest economy and act as a catalyst for many industries globally. Lastly, we further observe that back-to-back down years for equity markets are historically rare. Since 1950, the S&P 500 Index has seen consecutive calendar years of negative returns only three times.

With many market participants worried about the potential for an economic recession, we remind investors that equity markets tend to bottom well before main economic data points such as gross domestic product, payrolls and corporate earnings. In other words, the equity market tends to be a leading indicator of the economy and typically acts as a forward-discounting mechanism. We note that U.S. money market assets have now topped a record level of US$5.1 trillion, providing plenty of potential dry powder for further equity market advances. Adding to this, seasonality trends appear to be favourable for equities. The third year of the presidential cycle historically being the most robust, averaging a 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 have been adding to high-quality, value-oriented equity positions in our client portfolio mandates. Indeed, global value and high-quality equity indices have been outpacing global growth indices since 2021. With the recent dislocation in the financial sector, we see compelling long-term opportunities in the large-cap well-capitalized names in this sector. The consumer discretionary sector also looks attractive with inflation easing and the anticipated recovery of China’s economy and middle-income consumers. Energy shares continue to look attractive given the overall demand-supply imbalance and strong company fundamentals of the sector. While we are currently overweight in U.S. and Canadian equity markets, we see a path for international equities to build momentum. 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:

BANK OF AMERICA (BAC NYSE)

Last bought in March 2023 at ~US$28

Bank of America is one of the world’s largest financial institutions, with more than US$3 trillion in assets and over US$100 billion in forecasted 2023 revenue. The company is organized into four major segments, consumer banking, global wealth and investment management, global banking as well as global markets. With the recent selloff in bank stocks, Bank of America shares appear attractive, down more than 16 per cent since the onset of the banking turmoil. U.S. banks such as Bank of America are well-diversified across multiple business segments, deposit bases and geographies. The mega-cap U.S. banks may indeed benefit from the turmoil as customers seek safety in the biggest banks viewed as too big to fail. In fact, Bank of America gained more than US$15 billion in deposits in the days following the Silicon Valley Bank failure. The shares are trading at a discount to book value and pay a 3.1 per cent dividend yield. The company reports its next quarterly results on April 18, 2023. 

MANULIFE FINANCIAL (MFC TSX)

Last bought in March 2023 at ~$24

With over $1.3 trillion in assets under management and administration coupled with a market capitalization of over $45 billion, Manulife is one of the world’s largest life insurance companies. Manulife offers annuity, pension, life insurance, health insurance and asset management products operating in North America and Asia. With Asia representing over 50 per cent of Manulife’s overall revenue, the company stands to benefit long-term from the region’s growing middle class and its increasing demand for insurance and wealth management products. As well, an aging global population is a catalyst for greater demand for Manulife’s wealth management offerings. The shares are down more than 10 per cent since the onset of the banking crisis and look attractive. MFC currently trades at 0.9x price-to-book, a meaningful discount to its peer group. The shares also pay an attractive 5.9 per cent dividend yield which is expected to grow moderately over the next few years. Manulife reports its next quarterly results on May 10.  , 2023  

KERING SA (PPRUY OTC)

Last bought in March 2023 at ~US$60

With nearly €$22 billion in forecasted 2023 revenue, Kering is the world’s second-largest luxury goods company. Kering’s flagship luxury brand Gucci, accounts for 55 per cent of the company’s revenue and over 70 per cent of operating profits. Its other leading global luxury brands include Alexander McQueen, Brioni, Balenciaga, Bottega Veneta and Saint Laurent. The company boasts a strong balance sheet and robust operating margins. Longer-term, global consumer trends for personal luxury goods and the growing middle class in Asia should translate into even greater sales and margins for Kering. Today, Asia represents 40 per cent of the company’s sales. Kering operates more than 1,500 stores worldwide and is headquartered in Paris, France. The company reports its next quarterly results on July 27, 2023.