Stan Wong, portfolio manager, Scotia Wealth Management

FOCUS: North American large caps and ETFs 

MARKET OUTLOOK:

Since the October 2022 intraday lows, the MSCI World Index has advanced by more than 20 per cent and the S&P 500 Index has climbed over 17 per cent. From a technical perspective, equity markets have been rather resilient. For over six months, the major equity market indices have been pacing an uptrend, marking a path of higher highs and higher lows.

From our view at The Stan Wong Group, equity markets may be approaching overhead supply resistance levels, but there are several considerations to remain constructive beyond the near term. Around the world, inflation (the market’s primary concern in 2022) is quickly subsiding. In the U.S., year-over-year inflation has now cooled for nine consecutive months. Improving inflation data could allow central banks to pivot to a more dovish tone later this year.

Indeed, a more stable interest rate environment could provide further tailwinds for equities and bonds, as it has historically. Other factors to remain constructive are solid U.S. retail sales figures and better-than-expected corporate earnings data. Lastly, China’s withdrawal from its zero-COVID-19 policy should allow for a meaningful catalyst for its economy and many industries globally. Of course, recession worries continue to stir among many market participants. However, we remind investors that equity markets tend to bottom well before key economic data points (gross domestic product, payrolls, and corporate earnings). In other words, the equity market tends to be a leading indicator of the economy and acts as a forward-discounting mechanism.

In Stan Wong Managed Portfolios, we continue to add high quality, value-oriented equity positions to our client portfolio mandates. Indeed, value and high quality equity indices have been outpacing growth indices since 2021. Financials, consumer discretionary and energy are our preferred sectors. The valuations for large-cap financials look attractive while cooling inflation and the consumer revival in China bode well for select consumer discretionary stocks. The energy sector remains compelling as supply remains constrained against a backdrop of steady global demand. We are currently overweight U.S. and Canadian equity markets, but we see a path for international equities to build momentum ahead. Generally, valuations in European and Asian equity markets look more attractive relative to North American equity markets. In our fixed-income allocation, we favour short-duration and medium-duration government bonds and investment-grade corporate bonds.

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TOP PICKS

LVMH MOET HENNESSY (LVMUY OTC)

 Last bought in March at ~US$163

LVMH is a diversified global producer and distributor of luxury goods. The company operates in several distinct business segments. This includes fashion and leather goods, watches and jewelry, wines and spirits, as well as 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.

Last month, management announced a shareholder-friendly €1.5 billion share buyback program. 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 the broader MSCI World Index since mid-2016. The company reports its next quarterly results on July 26.

STARBUCKS (SBUX NASD)

 Last bought in March at ~US$97

Starbucks is one of the world’s most widely recognized restaurant brands, operating more than 36,000 stores across 84 countries. With more than US$36 billion in expected revenues for the fiscal year, Starbucks operates in three segments: North America, international markets, and channel development (grocery and ready-to-drink beverages). The coffee chain generates revenue from company-operated stores, royalties, sales of equipment and products to licensed partners, ready-to-drink beverages, packaged coffee, and single-serve products.

This week, Starbucks reported revenue and earnings that topped analyst expectations. Management also reiterated its financial forecasts for the fiscal year, while announcing plans to expand its footprint in the U.S. and China. In the U.S., digital loyalty members have now grown to over 30 million people. The company’s second-largest market, China, remains a significant long-term growth driver. By 2025, Starbucks plans to operate 9,000 stores in China (from over 6,000 stores today), allowing the Company to benefit from the country’s urbanization and growing middle class. From a relative strength perspective, Starbucks shares have been outpacing the broader S&P 500 Index since May 2022. The shares currently yield a two per cent dividend and the company reports its next quarterly results on Aug. 1.

VISA (V NYSE)

Last bought in March at ~US$210

Visa is the world’s leader in digital payments boasting about 3.9 billion credit and other payment cards in circulation across more than 200 countries. The company is expected to gross over US$32 billion in revenue for the fiscal year. Last month, Visa reported revenue and earnings that exceeded analyst expectations. A continued post-pandemic rebound in international travel helped boost results. Management also provided an optimistic outlook ahead, citing a recovery in cross-border transactions and a revival in consumer spending as key growth drivers. Visa enjoys a dominant market share, a strong balance sheet, and global brand recognition. Longer-term, the secular trend of electronic payments should have plenty of runway for growth – providing investors with predictable sales and earnings. 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 July 26.

PAST PICKS: May 5, 2022

COSTCO WHOLESALE (COST NASD)

• Then: $517.32
• Now: $489.84
• Return: -5%
• Total Return: -5%

CVS HEALTH (CVS NYSE)

• Then: $97.73
• Now: $69.27
• Return: -29%
• Total Return: -27%

MOSAIC (MOS NYSE)

• Then: $64.73
• Now: $39.80
• Return: -39%
• Total Return: -37%

Total Return Average: -23%