Stan Wong, portfolio manager, Scotia Wealth Management

FOCUS: North American large caps and ETFs 

MARKET OUTLOOK:

Staying true to historical seasonality patterns, the months of August and September (thus far) have demonstrated to be a more challenging time for equity markets. Moreover, market headwinds have been exacerbated by the tightening of financial conditions, namely the recent climb in bond yields and energy prices. Nonetheless, since reaching their lowest levels in October 2022, major equity indices have registered significant gains. The MSCI World Index and S&P 500 Index have gained over 25 per cent while the Nasdaq Composite Index has surged by over 35 per cent. Here at home, the S&P/TSX Composite Index has advanced 13 per cent since the October lows.

At the Stan Wong Group, we maintain a constructive outlook on equity markets. Inflationary pressures are quickly subsiding with U.S. year-over-year inflation now at 3.7 per cent, significantly lower than last summer’s high of 9.1 per cent. Looking ahead, we anticipate both Bank of Canada overnight rates and the U.S. Federal Funds Rate to stabilize, with potential downward movement by mid-to-late 2024. Historically, such a stable interest rate environment has provided a favourable backdrop for both equities and bonds. Furthermore, S&P 500 earnings estimates have improved, driven by better-than-expected economic data, robust U.S. consumer spending and a healthy labour market. Overall, the likelihood of a severe U.S. economic contraction has considerably diminished.

In Stan Wong Managed Portfolios, we continue to add high-quality equity positions to our client portfolio mandates. We favour the financials, consumer discretionary, health care, and energy sectors, along with technology companies that offer reasonable valuations. Geographically, our equity allocation encompasses approximately 52 per cent in U.S. equities, 30 per cent in Canadian equities, and around 18 per cent in international equities. Within our fixed income allocation, we prefer government and investment-grade corporate bonds with both short and medium durations. Fundamentally, our overall strategic allocation is carefully constructed to maximize returns while effectively mitigating risk for our clients.

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TOP PICKS

AMAZON.COM (AMZN NASD)

Last bought in July 2023 at ~US$130

With nearly US$570 billion in projected 2023 revenue, Amazon continues to be a dominant force in e-commerce, cloud services, digital streaming, and artificial intelligence. Amazon’s strategic expansion into other industries, including healthcare and logistics, not only unlocks substantial growth avenues but also diversifies revenue streams. Amazon Web Services (AWS), the cloud segment, continues to gain significant traction. AWS now commands about one-third of the world’s market share in cloud infrastructure. Moreover, the company’s high-margin advertising business continues to scale quickly and should enhance profitability in the coming years. The supportimpressive expansion of Amazon Prime, with over 200 million paying members today, underscores the company's exceptional customer loyalty. Looking forward, Amazon’s annualized earnings growth rate is anticipated to well-surpass 25 per cent. AMZN reports its next quarterly results on Oct. 27.

FORTINET (FTNT NASD)

Last bought this month at ~US$60

With projected 2023 revenue exceeding US$5.4 billion, Fortinet is a global leader in the cybersecurity and networking solutions industry. It caters to a wide variety of organizations including enterprises, communication and security service providers, government organizations, and small businesses. Fortinet is well-positioned to capitalize on robust secular trends, driven by the escalating cyber threats affecting organizations worldwide, the expanding digital transformation landscape, and the substantial costs associated with security breaches for both corporations and governments. The accelerating adoption of remote work trends, Internet of Things (IoT), and ongoing cybersecurity innovation should further drive future growth for the company. Fortinet is forecasted to deliver an impressive earnings per share growth rate of 18 to 20 per cent growth rate over the next several years. The company reports its next quarterly results on Nov. 2.

PEPSICO (PEP NASD)

Last bought this month at ~US$174

With projected 2023 revenue exceeding US$92 billion, PepsiCo is a leading global consumer staples powerhouse with a diverse portfolio of beverage and convenient food company brands. Some of these popular brands include Lays, Doritos, Gatorade, Pepsi-Cola, Mountain Dew, Quaker, and SodaStream.

The company's strong balance sheet and robust cash flows should continue to support reliable dividend payments and share buybacks, making the shares an attractive choice for income-focused investors. Long-term prospects for PepsiCo appear promising, with a track record of sustained growth and stability. Over the past decade, the shares have consistently charted an upward path marked by a pattern of higher highs and higher lows. Furthermore, the shares have demonstrated a lower beta when compared to the broader S&P 500 Index, indicating a notable degree of stability in PepsiCo’s performance. PepsiCo shares offer a 2.8 per cent dividend yield, which is forecasted to grow at an annual rate of seven per cent over the next several years. The company reports its next quarterly results on Oct. 10. 

Past Picks: September 8, 2022

EXXON MOBIL (XOM NYSE)

• Then: US$94.91
• Now: US$118.17
• Return: 25%
• Total Return: 29%

ISHARES TSX HIGH DIVIDEND ETF (XEI TSX)

• Then: $25.19
• Now: $24.60
• Return: -2%
• Total Return: 3%

UNITEDHEALTH GROUP (UNH NYSE)

• Then: US$527.51
• Now: US$479.81
• Return: -9%
• Total Return: -7%

Total Return Average: 8%