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Frothy U.S. market a good bet for Canadian investors

Traders work the floor at the New York Stock Exchange in December. A resurgent U.S. banking sector is helping to light a fire under U.S. markets.


For investors, the world can be a pretty scary place. If you paid attention to every media report of a possible economic and financial calamity – a hard landing in China, the fiscal cliff in the United States or the latest, a possible loan default by tiny Cyprus – you might be paralyzed with indecision.

The reality is that equities in most of the world have had a pretty good run so far in 2013 and it's still a good time to invest, providing you are picky about where you park your money, have realistic time horizons and some appetite for risk.

So where are the experts seeing further good times for equities? The best bet seems to be south of the border.

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"If I had to pick one single region I would favour right now it would actually be the U.S., simply because while it has some fiscal risk we think the risk is less severe than what we are looking at in Europe and Japan, and we think that the U.S. recovery is beginning to slowly and surely gain momentum," said Douglas Porter, chief economist and managing director of BMO Nesbitt Burns Inc. in Toronto.

Under his scenario, U.S. equities should do well with a private sector-led recovery, and equity prices will also continue to get a boost from the U.S. Federal Reserve as it keeps interest rates low and pumps liquidity into the economy, much of which ends up in stocks, pushing them higher, said Mr. Porter. "The Fed is ultimately forcing people to take on more risk by taking the income out of fixed income."

Also helping the S&P 500 to outpace Canadian exchanges are stronger forecast GDP growth in the U.S. compared with Canada, and far less exposure to commodities, Mr. Porter said.

While it is true that the Canadian markets have lagged their U.S. counterparts and many foreign exchanges, performance has been uneven and dragged down by Canada's commodity-heavy mix. "If you split out [commodities], the rest of our markets have easily been keeping pace with the U.S.," said Craig Basinger, chief investment officer with Macquarie Private Wealth in Toronto. "Our banks, financials, consumer discretionary, telecom" have kept pace. "Call it a tale of two markets."

Mr. Basinger's firm continues to be more positive about the prospects for U.S. equities generally, as the country has neatly sidestepped the worst of the so-called fiscal cliff, China has had a soft rather than hard landing and Europe appears less scary than at the height of its debt crisis.

If Mr. Basinger has one concern with the U.S. equities markets, it is the "extremely homogeneous" performance of stocks across most sectors. Since the start of the year, the best performing sectors have been health care and consumer staples, with most sectors gaining between 7 and 11 per cent, excluding technology, which has been dragged down by Apple Inc.'s price retreat, and the relatively tiny materials sector. "Everything is higher, but is it a sustainable rally if the defensive sectors are the ones leading?"

He characterizes the U.S. markets today as overwhelmingly "news driven," with investor sentiment trumping investment fundamentals. Things could shift quickly. Still, Mr. Basinger said the U.S. is more likely to "surprise on the upside" as the positive effects of a housing rebound and rising oil and natural gas production lift the economy.

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Canadian markets – and investors – benefited from nearly a decade of rising commodity prices, but it is unlikely that the party is going to restart any time soon. While a slowing economy in China and that country's focus more on internal development rather than export-led growth plays a role in slumping commodity prices for metals such as copper and nickel, a bigger factor is the expansion of mine production around the world that is the fruit of investments made a decade ago, noted Patricia Mohr, vice-president of economics and commodity markets specialist with the Bank of Nova Scotia in Toronto. She does not see a turnaround for commodities coming until 2015.

Tough times for commodity producers have created "bargains" among Canadian resource players, however, said Ms. Mohr. "If you are willing to hold stocks for a number of years, I think there are some real bargains out there. Some of the oil and gas names are very heavily discounted."

Canadian energy producers could see a price lift if the U.S. government gives approval for the Keystone XL pipeline. Among those that would benefit are Cenovus Energy Inc. and Canadian Natural Resources Ltd., she said.

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