Stan Wong, portfolio manager, Scotia Wealth Management

FOCUS: North American large caps and ETFs 

MARKET OUTLOOK:

Equity markets continue to defy the pessimism of the market’s bears as the recovery rally approaches its eighth month. Since hitting their lowest levels in October 2022, the MSCI World Index has advanced by more than 24 per cent, while the S&P 500 Index has risen by more than 22 per cent. Meanwhile, the tech-heavy Nasdaq Composite Index has surged by over 30 per cent. Recent market gains have been fuelled by the resolution of the U.S. debt ceiling impasse, resilient U.S. economic data, and solid corporate earnings. Certainly, the S&P 500 Index’s performance this year has largely been driven by a small handful of mega-cap technology and communications stocks, giving rise to concerns regarding market breadth. That said, there are some encouraging signs of broader market participation, with the percentage of S&P 500 Index constituents trading above their 200-day moving average now approaching 60 per cent.

 At The Stan Wong Group, we remain prudently constructive on equity markets. Inflation appears to be moderating, as U.S. year-over-year inflation has now declined for 10 consecutive months. Consequently, the U.S. Federal Reserve seems to have shifted towards a more accommodative position, signalling a pause in the rate hiking cycle. A more stable interest rate environment has historically provided tailwinds for equities (and bonds). While recession worries continue to stir among many market participants, it is worth noting that equity markets often reach their trough well in advance of key economic data points such as gross domestic product, payrolls and corporate earnings. In other words, the equity market tends to act as a leading indicator of the economy, functioning as a forward-discounting mechanism. By acknowledging this relationship, investors can better comprehend the market's ability to anticipate and reflect future economic conditions.

In Stan Wong Managed Portfolios, we continue to add high-quality equity positions to our client portfolio mandates. We favour the financials, consumer discretionary, and energy sectors; along with technology companies that offer reasonable valuations. Large-cap financials offer attractive valuations while cooling inflationary pressures and the resurgence of consumer activity in China are expected to positively impact many consumer discretionary stocks. The energy sector remains compelling as supply remains constrained against a backdrop of steady global demand. Reasonably priced technology names offer attractive growth potential as innovation in areas such as artificial intelligence, cloud computing and digital transformation accelerate. From a geographic perspective, we currently have an overweight position in U.S. and Canadian equity markets, while recognizing the potential for international equities to gather momentum ahead. Generally, European and Asian equity markets appear to offer more appealing valuations compared to their North American counterparts. Within our fixed income allocation, we hold a preference for government bonds with both short and medium durations, as well as investment-grade corporate bonds.

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TOP PICKS:

ALPHABET (GOOGL NASD)

Last bought in May at ~US$105

With nearly US$250 billion in expected fiscal 2023 revenues, Alphabet, the parent company of Google, is the world’s undisputed powerhouse in search and digital advertising. The Android operating system serves as the world’s most widely used smartphone operating system, with over 70 per cent market share. Alphabet also encompasses a vast array of internet-based services, such as YouTube, the largest video-sharing platform globally. With an increasing demand for cloud computing services, the company’s cloud segment has experienced substantial growth, bolstering Alphabet's overall financial performance. Other revenue streams are derived from the sales of hardware products, including Chromebooks, the Pixel smartphone, and smart home devices. Demonstrating its global reach and impact, Alphabet generates more than 50 per cent of its revenue from international markets. Among the major technology giants, Alphabet offers one of the more attractive valuations with the shares trading at 1.3x estimated PEG (price/earnings to growth) ratio. From a relative strength perspective, GOOGL shares have been meaningfully outpacing the broader S&P 500 Index since the late-2022 lows. The company reports its next quarterly results on July 26.

 ASML HOLDING N.V. (ASML NASD)

Last bought this month at ~US$717

Founded in 1984 and headquartered in the Netherlands, ASML is a global leader in cutting-edge semiconductor equipment, specializing in lithography systems used in the manufacturing of integrated circuits. The company offers chipmakers comprehensive hardware, software, and services to facilitate semiconductor production. With a dominant market position and a commitment to technological advancement, ASML empowers the creation of smaller, more potent chips. Major semiconductor manufacturers, including Intel, Samsung, and Taiwan Semiconductor, rely on ASML's products. Approximately 90 per cent of the company’s revenue is derived from the Asian market. Looking ahead, we continue to anticipate robust revenue expansion, earnings growth, and return on invested capital (ROIC) from ASML. The shares trade at a compelling 1.3x estimated PEG (price/earnings to growth) ratio. The company reports its next quarterly results on July 19.

STARBUCKS (SBUX NASD)

Last bought this month at ~US$98

Starbucks is one of the world’s most widely recognized restaurant brands, operating a vast network of 36,000 stores across 84 countries. Revenue is anticipated to surpass US$36 billion this fiscal year. Starbucks operates in three segments, North America, international markets, and channel development (grocery and ready-to-drink beverages). The coffee giant generates revenue from multiple sources, including company-operated stores, royalties, equipment and product sales to licensed partners; ready-to-drink beverages, packaged coffee, and single-serve products. Recently, Starbucks reported revenue and earnings that exceeded analyst expectations. Additionally, the company unveiled strategic plans to expand its footprint in the United States and China. Remarkably, Starbucks has attracted over 30 million members to its digital loyalty program in the U.S., while China remains a key growth driver. With a vision to operate 9,000 stores in China by 2025 (compared to the current 6,000+), Starbucks aims to leverage the country's urbanization and expanding middle-class population. From a relative strength perspective, SBUX has been outpacing the broader S&P 500 Index since May 2022. The shares currently yield a 2.2 per cent dividend and it reports its next quarterly results on Aug. 1.

PAST PICKS: June 23, 2022

COSTCO WHOLESALE (COST NASD)

• Then: US$475.00
• Now: US$517.94
• Return: 9%
• Total Return: 10%

ISHARES TSX HIGH DIVIDEND ETF (XEI TSX)

• Then: $24.88
• Now: $24.66
• Return: -1%
• Total Return: 4%

SHELL PLC (SHEL NYSE)

• Then: US$49.17
• Now: US$58.20
• Return: 18%
• Total Return: 23%

Total Return Average: 12%