As we approach the end of summer, U.S. equity markets have recently stalled amidst geopolitical tensions and White House turmoil. Yet, fundamentals such as positive economic data and solid corporate earnings have largely been overshadowed by the negative political headlines. While valuations remain somewhat extended, continued corporate earnings growth and positive economic news globally should help push stocks higher. Should the White House at some point be successful in passing its much-anticipated tax reform and deregulation policies, this would further rally U.S. equities higher.
In Canada, the TSX continues to be a laggard with energy prices remaining weak and the softening housing market casting an uncertain shadow on the economy. The precarious outcome of the NAFTA renegotiations has also caused some uncertainty for Canadian equity investors. Going forward, we will need to see signs of a countertrend rally in energy prices, clarity surrounding future trade with the U.S. and data that indicates a more balanced housing market for the TSX to reverse course and move higher.
When looking at international markets, economic and market data continue to improve in all major regions. In Europe, we are seeing accelerating economic expansion and a steady earnings outlook. In Asia, the region’s backdrop appears encouraging with China and Japan still indicating solid economic growth and improved corporate earnings. Lastly, the emerging markets look attractive with economic reforms, stronger corporate fundamentals and reasonable valuations supportive of equity prices. Indeed, international equity markets (with lower price-earnings and price-to-book multiples and higher dividend yields) currently appear more compelling than North American equity markets from a valuation screen.
In Stan Wong Managed Portfolios, we are overweight in the financials, technology and consumer discretionary sectors while underweight defensive areas such as utilities, real estate and consumer staples. We also generally favour high-quality stocks and expect dividend growers to outperform dividend payers. We are balanced between growth and value stocks but expect value stocks to eventually outpace growth stocks over the intermediate term as interest rates move higher. We continue to add to international equity markets as we expect these positions to generally outperform North American equity markets based on relative valuation metrics. As expected, we have seen an uptick in market volatility lately and expect it to remain elevated moving forward. This will provide us with buying opportunities as we believe that the strategy of “buying on the dips” remains prudent.