Stan Wong, portfolio manager at Scotia Wealth Management
FOCUS: North American large caps and ETFs

MARKET OUTLOOK:

After falling nearly 15 per cent to start the year, market volatility has eased somewhat, and the S&P 500 Index has bounced nine per cent higher in the past 2 weeks. Here in Canada, the TSX has faired better year-to-date with its heavier weighting (over 29 per cent) in energy and materials stocks.

Of note, the rising interest rate environment is compelling prudent investors to reassess their weightings in long-duration assets and higher multiple stocks, particularly names in the information technology sector. The S&P 500 Information Technology Index currently trades at nearly 7x price-to-sales, a multiple last seen in March 2000 before the technology index slid 82 per cent over the next two years.

Another consideration is that the S&P 500 technology sector has outpaced the broader S&P 500 Index in each of the past eight calendar years. As such, the rationale of mean reversion tells us that further outperformance seems improbable. 

We continue to believe that in the absence of an imminent recession (or black swan event), a sustained equity bear market is unlikely to materialize. From our view, the global economy should continue to rebuild and reopen from the aftermath of the pandemic, producing constructive economic data. While economic growth may be somewhat dampened due to the effects of rising interest rates, inflation and geopolitical pressures, an economic contraction seems unlikely in our view.

In Stan Wong Managed Portfolios, we prefer cyclical stocks and have tilted our allocation to value stocks. The financial, energy, materials and health care sectors look particularly attractive to us. Indeed, stock and sector selection will be increasingly important as the economic cycle matures. From a geographic perspective, we like U.S. equity markets for its breadth and depth of high-quality names but see valuations in international markets as somewhat more attractive. In our fixed income allocation, we are underweight government bonds in favour of inflation-protected bonds and short-duration corporate bonds.

TOP PICKS:

iShares Global Energy ETF (IXC NYSE)

Last bought in March 2022 at ~US$34

The iShares Global Energy ETF provides exposure to a basket of large-cap energy companies around the world with about 59 per cent allocated to the U.S. and the remainder to international markets including Canada.

Energy prices are being supported by improving global demand, diminished supplies and a drawdown in inventories. Large-cap global energy companies generally have strong balance sheets, strong free cash flow and have become more disciplined with expense and capital management. Valuations in the energy sector continue to look attractive relative to other sectors.

Share prices have not kept up with rising earnings forecasts and oil prices. Increasing interest rates and rising inflation expectations also bode well for the sector. Top holdings in the iShares Global Energy ETF include Exxon Mobil, Chevron, Shell PLC, ConocoPhillips and Canadian Natural Resources. IXC currently pays a dividend yield of over 3.0 per cent.

Nutrien Ltd (NTR TSX)

Last bought in March 2022 at ~C$120

With over US$35 billion in revenue, Nutrien is the world’s largest fertilizer producer by capacity. Nutrien produces the three major crop nutrients – nitrogen, potash, and phosphate. It is also the largest agricultural retailer in the United States, selling fertilizers, crop chemicals, seeds, and services directly to farming consumers through its physical stores and online platforms.

Longer-term, declining arable land per capita worldwide will force growers to become more productive, thereby pushing further growth in crop input demand. As well, developing countries such as China and India are working to secure food supply and are expected to propel demand for potash.

In its latest quarterly earnings report, Nutrien signaled strong forward guidance and announced a stock buyback of 10 per cent of its shares. NTR shares currently pay a 1.8 per cent dividend yield and the company reports its next quarterly results on May 2nd. 

Wells Fargo & Co (WFC NYSE)

Last bought in March 2022 at ~US$46

With assets of US$1.9 trillion and 7,500 branch locations, Wells Fargo is one the largest banks in the United States. Wells Fargo is split into four primary segments: consumer banking, commercial banking, corporate and investment banking, and wealth and investment management.

The bank continues to be one of the top deposit gatherers in the U.S., behind only JPMorgan Chase and Bank of America. All of WFC’s revenues are derived from the United States – well-insulated from geopolitical disruptions. Under new leadership, the bank is actively reducing expenses and boosting margins. With the economy reopening and interest rates rising (along with net interest margins), the financial sector in general looks attractive.

Among the big four U.S. banks, Wells Fargo is highly sensitive to interest rate moves, giving it the potential for additional earnings boosts as the Fed rate hike cycle accelerates. WFC trades at a 1.1x price-to-book multiple, a discount to its peer group and most of the larger U.S. banks. The shares currently pay a 2.1 per cent dividend yield which is expected to grow materially over the next several years. The company reports its next quarterly results on April 14th.

PAST PICKS: April 7, 2021

MASTERCARD INC (MA NYSE)

• Then: $371.08
• Now: $362.99
• Return: -2.18%
• Total Return: -1.69%

UBS GROUP AG (UBS NYSE)

• Then: $16.22
• Now: $19.71
• Return:  21.51%
• Total Return: 23.80%

UNITED AIRLINES HOLDINGS (UAL NASD)

• Then: $59.57
• Now: $46.50
• Return: -21.94%
• Total Return: -21.94%

Total Return Average: 0.05%