Stan Wong, portfolio manager for Scotland Wealth Management
FOCUS: US large capitalizations and ETFs
MARKET OUTLOOK:
With US inflation reaching a 40-year high of 8.6% over the twelve months to May, equity market volatility continues to rise significantly. The S&P 500 index, the Nasdaq Composite index and the MSCI World index have fallen in a technical bearish market. To date, the energy sector has been the only sector with good results that has advanced more than 25% in most major markets. To curb inflation, the Federal Reserve last week raised its benchmark interest rate by 75 basis points, its most aggressive rate hike in nearly 27 years. Undoubtedly, the combination of high inflation and falconry central banks around the world has forced many market participants to consider the possibility of an impending economic recession.
Given the recent price action and various sentiment indicators, it appears that the market has had a decided price in an economic recession. From a fundamental perspective, valuations have fallen significantly with the S&P 500 index now trading at 16 times the long-term price-benefit. From a technical point of view, the stocks are oversold and most major markets are trading up to key levels of the relative strength index (RSI). The global breadth of the market is especially weak, as only 5% of the components of the S&P 500 index are trading above their 50-day moving average and only 15% above their 200-day moving average. . Often considered the market fear indicator, the CBOE volatility index (VIX) has risen to critical levels. In addition, the American Investors Association (AAII) bearish sentiment reading recently hit a 10-year high, surpassing March 2020 levels.
Despite the gloomy mood of the markets and the challenging economic climate, we see opportunities as investors ’emotions shift to fear and panic. As always, we encourage investors to heed the old aphorism of investing “be afraid when others are greedy and greedy when others are afraid.” Undoubtedly, the greatest opportunities lie in the most awkward and disturbing moments. To be clear, we consider bear markets to be periods of enormous opportunity for prudent investors looking beyond the uncertainties of the short-term time horizon. The possible easing of supply chain pressures and colder inflation data should act as a catalyst for a significant recovery in the equity market. We have already seen inflation in the underlying CPI (CPI without food and energy) fall during the last two readings. In addition, the upcoming midterm elections in the United States look set to lead to a more pro-business Congress.
In Stan Wong’s managed portfolios, we have tilted our allocation to value equities and reduced our weighting in growth stocks. The financial, energy, materials and health sectors seem particularly attractive to us. We remain cautious with the technology sector (and other areas of higher-growth multiple growth) given the growing interest rate environment and relative valuations. The S&P 500 information technology index recently traded at a valuation high of 7.8 times the sales price in December (now at 5.3x the sales price). In March 2000, the technology index peaked at 7.5 times the selling price before falling 82% over the next 30 months. From a geographical perspective, we like the U.S. stock markets for their breadth and depth of high-quality names, while Canada seems attractive given its relative valuation discount. In our fixed income distribution, we are underweighting government bonds in favor of inflation-protected bonds and short-term corporate bonds.
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BEST SELECTIONS:
Stan Wong’s best options
Stan Wong, portfolio manager at Scotia Wealth Management, talks about his best options: Costco Wholesale Corporation, iShares S & P / TSX Composite High Dividend Index ETF and Shell PLC.
Wholesale COSTCO (COST NASD)
Last purchase this month at ~ 450 USD
With more than 116 million members worldwide and more than $ 225 billion in projected revenue for 2022, Costco is a dominant name in the mass commercial space. Costco continues to enjoy tremendously strong loyalty in the U.S. and Canada, with membership renewal rates remaining around 92 percent. Among mass retailers, Costco is a clear leader in cost leverage, purchasing power and in-store efficiency, allowing in-store traffic to remain exceptionally high. Despite the large size of its stores, the company concentrates its purchasing power on a relatively small number of items (about 4,000 units in the store compared to 140,000 units in large Walmart stores). Amid rising fuel costs and inflationary pressures, Costco’s value proposition remains more attractive to its members. The company reports its upcoming quarterly results on September 22, 2022.
ISHARES S & P / TSX COMPOSITE HIGH DIVIDEND INDEX ETF (XEI TSX)
Last purchase this month at ~ $ 25
The S & P / TSX Composite High Dividend Index ETF is designed to replicate the performance of the S & P / TSX Equity Income Index. The XEI ETF offers an attractive opportunity for investors looking for solid dividend income from established large Canadian companies. XEI currently pays a dividend yield of 3.9% with major holdings in Canadian banks, gas pipelines, utilities and telecommunications. With the iShares S & P / TSX high compound dividend index ETF still falling more than 12% over the past two months, this offers an attractive buying opportunity for high-quality Canadian dividend payers. The ETF has an expense ratio of 22 bp.
SHELL PLC (SHEL NYSE)
Last purchase this month at ~ 50 USD
Shell PLC is one of the largest integrated oil and gas companies in the world with some of the most attractive assets in the global energy sector, most notably the largest liquefied natural gas (LNG) business in the world and the largest chain of gas stations. fuel. Shell’s huge global reach spans more than 70 countries. Last month, the company announced its highest quarterly profit ($ 9.1 billion) since 2008 and announced plans to increase its dividend. Shell could significantly increase its dividend in the coming quarters, given its conservative dividend payout ratio of 20%. Shell is also conducting a $ 8.5 billion share repurchase program this year. As one of the world’s leading LNG players, Shell will benefit from rising global gas demand and stronger prices over the next decade. The shares give a dividend of 3.9 percent and are trading at just 5.3 times the expected earnings. The company reports its upcoming quarterly results on July 28, 2022.
PAST SELECTIONS: June 24, 2021
Stan Wong’s previous election
Stan Wong, portfolio manager at Scotia Wealth Management, talks about his previous election: ConocoPhillips, UnitedHealth Group Inc and iShares Global Financial ETF.
CONOCOPHILLIPS (COP NYSE)
- Then: $ 61.39
- Now: $ 92.92
- Yield: 51%
- Total yield: 55%
UNITEDHEALTH GROUP (UNH NYSE)
- Then: $ 398.87
- Now: $ 499.88
- Yield: 25%
- Total yield: 27%
ISHARES GLOBAL FINANCIAL ETF (IXG NYSE)
- Then: $ 77.90
- Now: $ 65.49
- Yield: -16%
- Total yield: -13%
Average total yield: 23%
COP NYSEIII UNH NYSE III IXG NYSE III