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What are we looking for?

Global stocks whose price movements have a low correlation to the rest of the market - and whose fortunes are looking up.

Zigging when the market zags

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One of the common themes in the stock market plunge and subsequent recovery over the past few years has been a distinct sameness in the market. Stocks have tended to move in the same direction across the entire breadth of the market - particularly during downturns - making it consistently difficult for investors to identify safe places to seek shelter when the market turns.

It's happening again now, say Brockhouse Cooper strategist Pierre Lapointe and financial economist Alex Bellefleur. The correlation in stock-price movements among the constituents of the S&P 500 is a lofty 0.64 - the fourth-highest level in the past decade. (A correlation of 1.0 reflects prices moving in perfect unison, while a reading of -1.0 reflects prices moving in perfectly opposite directions. A correlation of zero implies no statistical similarity at all between two price trends.)

Mr. Lapointe and Mr. Bellefleur believe the high correlations relate to the "risk" trade that has dominated global financial markets in recent months. Economic jitters and rising uncertainty about European and U.S. sovereign debt "have sent investors on an emotional roller-coaster," they wrote in a report this week. When news points to rising risks, everyone is fleeing higher-risk assets such as stocks. When the news suggests an easing of risk, they all jump back in.

"The principle of diversification works only if you can find uncorrelated stocks to add to a portfolio," Mr. Lapointe said. "If you add an uncorrelated stock to a portfolio, you lower the risk of that portfolio. If all stocks are correlated, adding one doesn't lower risk, as all stocks will move up or down together."

The screen

Mr. Lapointe and Mr. Bellefleur screened the S&P Global 1200 stock index to identify big-name stocks worldwide that have had low correlations with the rest of the index over the past three months. They screened further to identify which of these low-correlation stocks also saw their consensus recommendations from equity analysts rise in that time - implying an improving outlook for their stock price.

Spanish food company Distribuidora Internacional de Alimentacion SA showed the highest negative correlation, suggesting that in down markets, this defensive-sector stock has truly acted as a defensive play.

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The rest of the names on the list (which includes two Canadian companies, telecom giant BCE Inc. and gold producer Agnico-Eagle Mines Ltd. ) had correlations approaching zero. This suggests that they largely ignore the broader market trend - not a bad trait to have in the kind of unpredictable markets we might expect in the coming months.

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