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Gavin Graham, Director of Investments, BMO Asset Management (Kevin Van Paassen)
Gavin Graham, Director of Investments, BMO Asset Management (Kevin Van Paassen)

Earlier discussion

Why Canadian stocks look so good Add to ...

As you prepare your portfolio for the end of summer and the end of the recession, where should you be investing to profit from economic recovery?

Certainly in the Canadian stock market, says Gavin Graham, director of investments at BMO Asset Management. He believes the commodity-based Canadian economy will benefit from rising standards of living for the Asian middle class, particularly in China and India. He's also a great fan of Canada's financial system, which has successfully weathered the financial crisis.

Mr. Graham will be answering our readers' investing strategy questions online at noon (ET) on Monday, August 24th. You can get a jump on the queue by submitting your question here.

Mr. Graham joined Guardian Group of Funds as chief investment officer in 1999, and the company became a subsidiary of BMO in 2001. Prior to that, he managed investments in San Francisco and Hong Kong, and served as chief investment officer for Citibank Global Asset Management (Asia). He began his career in Britain in 1979 with Baring Brothers Ltd.

Editor's Note: globeandmail.com editors will read and allow or reject each question/comment. Comments/questions may be edited for length or clarity. HTML is not allowed. We will not publish questions/comments that include personal attacks on participants in these discussions, that make false or unsubstantiated allegations, that purport to quote people or reports where the purported quote or fact cannot be easily verified, or questions/comments that include vulgar language or libellous statements. Preference will be given to readers who submit questions/comments using their full name and home town, rather than a pseudonym.

Sonali Verma, Globe Investor: Hello, everyone, and thanks for joining us again this Monday. We've got a pile of questions waiting for Gavin Graham, so let's get started.

Jim Coldwell writes from Winnipeg: Mr. Graham, there are still many highly respected punduts who feel there's still significant potential for huge negative surprises for Canadian bank stocks. Could you please comment on this? Thanks.

Gavin Graham: Jim, I should begin the session by stating that the individual stocks I mention here and elsewhere are held in the BMOGuardian funds (or not where indicated) and are selected by the fund managers who run the funds.

With that proviso, I would reply that Canadian bank stocks were reflecting the potential for enormous negative surprises earlier this year in February and March, none of which have materialized in the results announced since then, and, as a result, their prices have rebounded sharply.

As I have noted on previous occasions, Canadian banks were simply much more conservative in their lending practices than U.S. or European banks, partially because they keep 70% of all mortgages on their own balance sheets and partially because the Canadian housing market was only down 9% from its peak of December 2007 at the beginning of this year and has since started to see price increases again. While credit losses will rise through the cycle, as they always do, they are a lagging indicator and bank prices have risen while bad debts have been increasing over the last few cycles.

Paul Cohen writes: Thanks for doing this, Gavin. I agree we should benefit from the rising living standards in Asia, particularly as it drives commodity demand. While we have seen a pretty good bump in prices already, I think demand may level out as inventories get replenished. Then I see much slower growth, especially considering the real numbers are likely less than the government's GDP growth "forecasts".

Do you agree with that, and what would you say in terms of time frame to recover to commodity stock price levels of early 2008?? Excluding oil, of course. Thanks very much.

Gavin Graham: Thank you for your detailed question. While one should always regard government economic figures with healthy scepticism, including those produced by developed countries ( John Williams' Shadow Government Statistics website is eye-opening on the quality of U.S. stats), and undoubtedly there has been a lot of "making the numbers" in China, especially, where such relatively trustworthy numbers as electric power output indicate growth is not as strong as the official figures.

Nonetheless the Asian countries are growing by at least mid single digits and using commodities while doing so. It makes sense for them to stockpile when the prices are much lower, as they have been doing to some extent, but their growth has led to Germany, Japan and France emerging from recession in Q2 this year, as their capital exports are mostly driven by Chinese and Asian demand, and thus industrial commodities (and agricultural as well, there's drought and a bad monsoon in China and India this season) have rebounded sharply.

It will take a while to get back to early 2008 levels though, as the deep recession in the developed world will restrain demand to some extent. Perhaps 2011 as a guess?

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