The U.S equity market is making new highs in what is a classic reflationary scenario in anticipation of the economic stimulus that is expected to be implemented by the new regime in the White House, says Michael Mattioli, managing director and portfolio manager at Manulife Asset Management (U.S.), LLC.
A member of the U.S. core value-equity team, Mattioli says that it is important to sift through president-elect Donald Trump's campaign promises to assess those which may indeed be translated into law and those that should be viewed as election rhetoric.
Mattioli considers that the federal budget-related items -- tax cuts, both personal and corporate, and increased fiscal spending -- "will likely get done." There will be a net stimulus to the U.S. economy, though the downside is a significant increase in federal government debt.
It will be more challenging for the new president to repeal or introduce changes to the Affordable Care Act, known as Obamacare. "Such an initiative will elicit harsher scrutiny from the Senate."
Another important economic plank of Trump's election platform, says Mattioli, was his undertaking to reassess key existing trade agreements, such as the North American Free Trade Agreement, so as to opt for an increased protectionist stance for the United States.
While it is, he says, within the president's purview to make changes to trade agreements, "it is telling that Trump has said little about this post-election." This could indicate, says Mattioli, that Trump is moving more toward the middle. "The financial community is hoping that there is a difference between Trump on the campaign trail and President Trump, in regards to trade," he says. It is hard to deny the importance of open trade for global economic growth, he adds.
These prospective and possible changes are the backdrop to a U.S. equity market that is "near full value by historic standards," says Mattioli. At recent count, the S&P 500 Index was trading at a trailing price/earnings multiple of 20 times, he notes, versus the long-term average of 16 times.
While the U.S. equity market as a whole is currently pricey, says Mattioli, there is a significant disparity in the valuation between sectors and this provides opportunities. "Our weightings in the different sectors reflect our assessment of bottom-up value in those sectors."
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| Michael Mattioli | |
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Manulife U.S. All Cap Equity, which at recent count held 44 names, has major weightings in the consumer-discretionary sector, financials and information technology, he notes. "We have been overweight these sectors for some time." By contrast, he says, sectors such as health care, consumer staples and industrials are generally expensive. "We are underweight these sectors."
The Manulife U.S. core-value equity team focuses on financially sound companies with distinct competitive advantages that trade at valuations well below the team's estimated intrinsic value.
There is, says Mattioli, still value to be found among the big U.S. banks, "though not as much value as there was pre-election." The prospect of a stronger U.S. economy, rising interest rates and a steeper yield curve is a plus for the banks, he says. "This kind of interest-rate environment provides a direct boost to bank earnings, as it widens the banks' net interest margins, the difference between the rates they pay on deposits and those that they earn on loans." At present, he says, bank-earnings estimates for 2017 and 2018 are on the low side, so there is "potential upside on the stocks."
Mattioli says that the financial markets are betting that there is a 100% chance that the U.S. Federal Reserve Board will raise its federal funds rate in mid-December. "The question is what the Fed will do in this regard in 2017 and 2018?"
Manulife U.S. All Cap Equity has significant weightings in three major U.S. banks: 
Citigroup Inc. (C), Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM).
Elsewhere in financial services, the U.S. core value equity team has sold the fund's holding in the money manager T. Rowe Price Group Inc. (TROW). "The firm is a long-only equity manager and will suffer if there is a reversal in the equity market," says Mattioli. "It is also facing the challenges of the trend to greater passive investing."
Instead, the team added another asset manager to the portfolio, Affiliated Managers Group, Inc. (AMG). "This is a holding company that owns stakes in a wide range of boutique asset managers, with its largest affiliate accounting for only 8% of revenue." This global asset-management holding company is thus far more diversified by way of styles and focuses than is T. Rowe Price, says Mattioli.
In the U.S. consumer-discretionary sector, a long-standing holding and the largest holding in the fund for a number of years is Amazon.com, Inc. (AMZN). The team has held this stock since 2002. "Despite its size, Amazon is successfully growing revenue at a strong pace." The company has been reporting positive earnings per share since 2015 and these earnings have been also "growing at a strong pace," says Mattioli.
In addition to its extensive online retail business, Amazon Web Services, the company's cloud-computing business, is a growing division for the company, he says. "This cloud-services business attracts higher margins than the retail business." On the retail side, Amazon continues to enjoy sustainable competitive advantages, says Mattioli, with strengths in areas such as its pricing, its wide selection of products and its free shipping. "The company is taking market share in a retail category that is growing."
A new consumer-discretionary name in Manulife U.S. All-Cap Equity is Polaris Industries Inc. (PII). This company manufactures all-terrain vehicles, side-by-side vehicles, motorcycles and snowmobiles. "The stock pulled back in the past year to the point where the risk/reward became attractive," says Mattioli. The company has had to deal with a recall in respect of one of its product lines and concerns about the strength in certain of its markets. "The sentiment surrounding the stock was quite poor, and we considered that the decline in the stock price was overdone relative to the company's fundamentals."
Importantly, says Mattioli, "the U.S. consumer continues to strengthen." Consumer balance sheets are improving and the labour market is strong, with jobless claims at a 40-year low, he notes. This is a distinct plus for both the consumer-discretionary sector, he says, and the whole U.S. economy.
A consumer-related company in the information-technology sector that is a top-10 holding in the fund is Facebook Inc. (FB). Mattioli notes that Facebook has some 15% of the Internet advertising pie and this share, over time, is likely to grow to 20%. It is estimated, says Mattioli, that one out of five minutes spent on the Internet is spent on Facebook and its participant retention is high. "This means that the company has the eyeballs and can sell advertising based on this." A caveat, he says, is that it is a volatile stock.
Another top-10 holding in the information-technology sector is Apple Inc. (AAPL). The company has a strong ecosystem, which effectively locks in the user of its products, says Mattioli. There is some concern, he says, that the global market for smartphones is reaching saturation, but Apple comes out with upgrades of its iPhone every two years and this is a boost to its sales. "Even if the company's growth is minimal, it is a strong cash-flow generator, has a large cash holding on its balance sheet and remains a powerful player in this industry." Furthermore, he says, the stock is cheap.
| Amazon.com, Inc. | Apple Inc. | Facebook Inc. | |
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| Nov. 28 close | $766.77 | $111.57 | $120.41 |
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| 52-week high/low | $847.21-$474.00 | $119.86-$89.47 | $133.50-$89.37 |
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| Market cap | $364.6 billion | $596.3 billion | $350.8 billion |
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| Total % return 1Y* | 13.9 | -3.4 | 14.2 |
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| Total % return 3Y* | 25.6 | 14.7 | 37.3 |
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| Total % return 5Y* | 31.6 | 17.5 | - |
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| *As of Nov. 28, 2016 Source: Morningstar |
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