Stan Wong, portfolio manager at Scotia Wealth Management

FOCUS: North American large caps and ETFs

MARKET OUTLOOK:

Equity markets have recovered somewhat with the S&P 500 Index climbing about eight per cent from its June intraday lows. While it is always difficult to ascertain a definitive market bottom during a correction, it is possible that the current bear market may have already marked a bottom or is closer to a bottom than many expect. At seven months old, the present bear market is getting long in the tooth given that six of the last eight bear markets have ended within six months. Inflation remains a primary concern for investors, but we note several encouraging signs that inflation may have hit an inflection point. Gasoline prices along with broad commodity prices have retreated sharply from their June highs while housing costs are also expected to cool. 

Indeed, market volatility is expected to remain elevated as we move through the latter part of the economic cycle. Central banks today face a trade-off between growth and inflation, attempting to rein in inflation (almost at all costs) while engineering a soft landing for the economy. As economic growth decelerates, we will likely see central banks change course next year and shift to a more dovish stance. With recession worries lingering, equity markets will likely remain bumpy over the near term. Despite the sombre mood of the markets and the challenging economic backdrop, we see opportunities where investor emotions swing to fear and panic. As always, we encourage investors to be fearful when others are greedy and greedy when others are fearful. Unquestionably, the greatest opportunities are found during the most uncomfortable and unsettling times. We reiterate our viewpoint that bear markets represent periods of tremendous opportunity for prudent investors able to look beyond near-term uncertainties.

In Stan Wong Managed Portfolios, we have tilted our allocation to value stocks and have reduced our weighting in growth stocks. The energy, health care and financial sectors look most attractive to us. We are underweight in the technology, communications and consumer discretionary sectors. From a geographic perspective, we like U.S. equity markets for its breadth and depth of high-quality names while Canada looks attractive given its relative valuation discount. In our fixed income allocation, we like inflation-protected bonds and short-duration corporate bonds but have also added some duration with government and investment-grade corporate bonds.

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TOP PICKS:

AMAZON.COM (AMZN NASD)

Last bought this month at ~US$102

With over US$520 billion in projected 2022 revenues, Amazon continues to be the undisputed leader in e-commerce and cloud services. AMZN shares are down nearly 40 per cent from its November highs, presenting a compelling opportunity for long-term investors. While e-commerce may struggle this year due to inflationary pressures and a post-lockdown resurgence in physical stores, Amazon’s cloud business – Amazon Web Services (AWS) continues to gain significant traction. AWS now enjoys about one-third of the world’s market share in cloud infrastructure. Additionally, the company’s high-margin advertising business continues to scale quickly and should boost margins over the next several years. Since 2018, Amazon’s Prime membership has doubled worldwide to 200 million paying members today. Looking forward, Amazon’s annualized earnings growth rate is projected to exceed 20 per cent. AMZN reports its next quarterly results on July 28.

CIGNA (CI NYSE)

Last bought this month at ~US$275

Cigna provides pharmacy benefit management and health insurance services in the United States. Its pharmacy benefit management services segment was greatly expanded through the merger with Express Scripts in 2018. Today, its largest pharmacy benefit management contract is with the U.S. Department of Defense. With insurance, the company offers life, accident, disability, supplemental, Medicare, and dental insurance products and services. This year, Cigna’s management is executing a shareholder-friendly US$10 billion share repurchase plan. Overall, the health care sector tends to perform well during periods of economic deceleration as it provides a unique combination of defensive attributes and growth characteristics. Cigna’s shares trade at 12x forecasted earnings and its annualized earnings growth rate is expected to top 11 per cent. Cigna currently pays a 1.6 per cent dividend yield and reports its next quarterly results on Aug. 4.   

SUNCOR ENERGY INC (SU TSX)

Last bought this month at ~$29

Suncor Energy is Canada’s largest integrated energy company, focused on developing the Athabasca oil sands basin. Suncor operates in three business segments, oil sands, exploration and production (E&P), and refining and marketing. The Company’s national retail distribution network falls under the Petro-Canada brand. Recent operational accidents have hampered the company causing its share price to lag behind its peers. However, the potential sale of its retail business could unlock significant shareholder value. Suncor shares now trade near its 200-day moving average, a potential support level. This spring, management announced a 12 per cent dividend increase and doubled its share repurchase plans to 10 per cent of shares outstanding. Broadly speaking, energy prices are expected to remain firm over the coming years given steady global demand, low inventories, and industry-wide underinvestment. Suncor currently pays an attractive 4.6 per cent dividend yield and reports its next quarterly results on Aug. 4.

PAST PICKS: August 5, 2021

ALIBABA (BABA NYSE)

• Then: $199.28
• Now: $100.87
• Return: -49%
• Total Return: -49%

ISHARES GLOBAL FINANCIALS ETF (IXG NYSE)

• Then: $78.09
• Now: $66.74
• Return: -15%
• Total Return: -11%

MANULIFE FINANCIAL (MFC TSX)

• Then: $24.56
• Now: $22.88
• Return: -7%
• Total Return: -2%

Total Return Average: -21%