Stan Wong, portfolio manager, Scotia Wealth Management

FOCUS: North American large caps and ETFs 

MARKET OUTLOOK:

Despite facing challenges such as a banking crisis, rising interest rates and lingering recession worries, equity markets have demonstrated remarkable resilience and have continued to push higher. The equity market rally, much to the dismay of market bears, has now extended over nine months. Since reaching their lowest levels in October 2022, major equity indices have experienced significant gains. The MSCI World Index, S&P 500 Index and Nasdaq Composite Index have all surged by about 30 per cent each. Here at home, the S&P/TSX Composite Index has advanced 15 per cent since the October lows. While much of the market’s returns earlier this year had been driven by a small handful of mega-cap technology and communications stocks, recent market breadth has expanded to include other stocks and sectors. Notably, over 75 per cent of S&P 500 Index constituents are now trading above their 200-day moving average, indicating broader market participation in the rally.

At the Stan Wong Group, we maintain a constructive outlook on equity markets. Inflationary pressures are quickly easing, as U.S. year-over-year inflation has now declined for twelve consecutive months. Looking ahead, we expect central banks to pause their rate-hiking programs and potentially begin lowering interest rates in 2024. Historically, a stable interest rate environment has been beneficial for both equities and bonds. Moreover, the U.S. consumer remains robust, and a healthy employment backdrop has helped steady the economy. These factors contribute to our positive outlook for the foreseeable future. Despite the possibility ahead for a soft patch in the economy, we anticipate that equity markets will continue their historical trend of looking beyond weaker near-term economic data points.

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. From a geographic perspective, we currently hold an overweight position in U.S. and Canadian equity markets, while recognizing the potential for international equities to gather more momentum ahead. Comparatively, European and Asian equity markets offer more attractive valuations compared to North American counterparts. Within our fixed income allocation, we hold a preference for government bonds with both short and medium durations, along with investment-grade corporate bonds. At its core, our overall strategic allocation is carefully constructed to maximize returns while effectively mitigating risk for our clients.

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TOP PICKS:

ASML HOLDING N.V. (ASML NASD)

Last bought this month at ~US$683

Founded in 1984 and headquartered in the Netherlands, ASML is a global leader in cutting-edge semiconductor manufacturing equipment, specializing in lithography systems for integrated circuit production. The company offers chipmakers comprehensive hardware, software, and services to facilitate semiconductor production. ASML’s dominant market position and commitment to technological advancement empower 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 expect strong revenue expansion, earnings growth, and return on invested capital (ROIC). Last week, management reported second-quarter earnings that surpassed expectations and further boosted its full-year sales forecast. The shares trade at a compelling 1.3x estimated PEG (price/earnings to growth) ratio. The company reports its next quarterly results on Oct. 18, 2023.

CANADIAN PACIFIC KANSAS CITY (CP TSX)

Last bought in June at ~$101

Canadian Pacific Kansas City is a leading player in the railroad industry, boasting a robust network connecting key markets across Canada, the U.S. and Mexico. With approximately 20,000 miles of rail in operation, the company delivers unmatched rail service and extensive network reach to customers across North America. Management’s commitment to enhancing profitability has yielded impressive results over the years. Longer term, CP’s efficient management style, strategic investments, and dedication to steady margin improvement positions it well for growth, particularly amid the ongoing economic recovery and rising demand for freight transportation services. From a relative strength perspective, CP shares have been meaningfully outpacing the broader S&P/TSX Composite Index for decades. The company reports its next quarterly results on Oct. 26, 2023.

MERCEDES-BENZ GROUP AG (MBGYY OTC)

Last bought in May 2023 at ~US$18

Mercedes-Benz, a leading manufacturer of premium and luxury cars and vans, commands a strong global presence and a rich history of innovation and customer loyalty. With forecasted 2023 revenue of over €153 billion and most of its total sales coming from Europe and Asia, the company is well-positioned to capitalize on improving supply chains and long-term growth of the Asian consumer. Additionally, Mercedes-Benz's steadfast commitment to the battery electric vehicle (BEV) category presents a promising opportunity for long-term growth. With plans to exclusively sell BEVs by 2030, the company targets a substantial 40 per cent growth rate in this segment, potentially challenging Tesla's dominance in the battery electric vehicle market. Another long-term consideration is that premium brands such as Mercedes-Benz are better insulated from economic downturns, primarily because spending patterns among affluent customers tend to be less sensitive during periods of economic weakness. We also note that the growth rate of the global population of high net-worth individuals has averaged a five per cent, increasing Mercedes’ addressable market faster than that of mass market automakers. Recently, management raised its earnings guidance for the 2023 full year. Mercedes-Benz stock provides compelling value, trading at 5.7x earnings – a meaningful discount to historical averages. The Company reports its next quarterly results on Oct. 26, 2023.

PAST PICKS: July 27, 2022

AMAZON.COM (AMZN NASD)

• Then: US$120.97
• Now: US$131.71
• Return: 9%
• Total Return: 9%

CIGNA (CI NYSE)

• Then: US$274.73
• Now: US$292.73
• Return: 7%
• Total Return: 8%

SUNCOR ENERGY (SU TSX)

• Then: $41.48
• Now: $40.11
• Return: -3%
• Total Return: 1%

Total Return Average: 6%