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TORONTO: JUNE 5, 2012-- Chief investment officer of BMO Paul Taylor speaks at a luncheon in Toronto on June 5, 2012. The bank announced the results of a study, that found nearly half of Canadian investors view the market volatility as a good opportunity to invest.Michelle Siu for The Globe and Mail/The Globe and Mail

Bank of Montreal's asset-management team has turned bullish on the struggling equity markets – but not all equities, and not all markets.

After shifting to an underweight position in equities in the middle of last year, BMO Global Asset Management chief investment officer Paul Taylor said that as of a few weeks ago the bank has returned its attention to downtrodden equities.

"We are looking at the current environment for opportunities to selectively buy Canadian equities," he told reporters at a luncheon Tuesday.

The decision to step up the equity weighting in BMO-managed portfolios reflects just how cheap stocks have become relative to fixed income, especially government bonds. The yield on a 10-year government of Canada bond is 1.75 per cent – while the dividend yield alone on the S&P/TSX composite index is 3 per cent.

"Equities are as attractively valued relative to government bonds as they have been in 60 years," said Stéphane Rochon, vice-president and head of private-client research at BMO Nesbitt Burns. "It feels to me like we are entering the final phase of the 'great bond bubble'."

Still, given the hard-to-predict political risks from Europe that hang over all financial markets, BMO's asset managers remain cautious about their equity call. They said they favour traditional defensive sectors such as utilities, telecoms, consumer staples and health care over the more volatile, cyclical sectors such as commodity stocks – and that means the resource-heavy Canadian stock market isn't their first choice for re-loading on equities.

"We are recommending an overweight in equities – but our entire overweight is in the U.S. market," Mr. Rochon said, noting that the U.S. equity market has a more defensive mix than the Canadian market. "Canadian investors need to increase their exposure to U.S. equities."

The bank's asset-management executives discussed these investing views at a media event at the Art Gallery of Ontario, in conjunction with the BMO-sponsored Picasso exhibition that recently opened at the downtown Toronto gallery. If there's a link between fine art and volatile stock markets, it may be that consumers of both are often driven more by emotion than logic – and BMO found some surprises in a recent survey of Canadian investors' emotional state.

The bank on Tuesday released the results of an survey it commissioned with pollster Pollara that showed that while 72 per cent of Canadian investors believe heightened volatility is the "new normal" in the markets, nearly half of the investors surveyed actually view this volatility as "a good opportunity to invest." Only 28 per cent said they believe the current volatile environment is a negative for investors.

"That surprised us," said Rajiv Silgardo, co-CEO of BMO Global Asset Management. "I'm encouraged by this."

But that resilient attitude could be tested for months or even years to come, he suggested.

"I believe this turmoil is here with us for the foreseeable future, until we can come up with some real, if difficult, solutions to these [sovereign] debt problems," Mr. Silgardo said.

Mr. Taylor said BMO's investing thesis is that the euro zone won't fall apart over the sovereign-debt crisis – because the long-term economic benefits of European economic union will motivate the member countries to find a solution and avoid break-up.

"It may require a sacrificial lamb," he said – adding that tiny Greece may have to be sacrificed by the euro zone in order to move forward.

In the meantime, he said, investors should seek strong dividend-paying stocks, in order to "get paid to wait."

Mr. Taylor highlighted several of his top Canadian stock picks that fit his dividend prescription: IGM Financial Inc. (5.5-per-cent dividend yield), Bird Construction Co. Ltd. (5.2-per-cent yield) and rival Toronto-Dominion Bank (3.7-per-cent yield).

He also identified one growth-oriented pick – discount store chain Dollarama Inc. – that doesn't fit with the "paid to wait" theme (its dividend yield is only 0.8 per cent), but is consistent with his defensive-sector call, as its low-end retail model tends to thrive when cash-strapped consumers are looking to cut costs.

"It's kind of recession-proof," he said.