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The Canadian retail sector is looking up as the economy begins to climb out of a recession and the jobs outlook improves.

What are the expectations?

Retail sales during August are forecast to have climbed by 0.4 per cent, compared with a 0.6-per-cent decline in July, according to a survey of economists by Bloomberg. The picture even looks better when the lagging auto sector is removed. Retail sales less autos are expected to have climbed 0.6 per cent in August, compared with a 0.8-per-cent plunge in July.

The rise in employment during August - the first in 10 months - has bolstered consumer confidence, said Michael Gregory, a senior economist with BMO Nesbitt Burns Inc. The inflation component of retail sales, with the exception of higher gasoline prices, also remains negligible, he said. "As such, real consumer spending appears on track to post another rise after the second quarter's 1.8-per-cent annualized advance."

How will the market react?

The shares of Sears Canada Inc., home improvement chain Rona Inc. and Reitmans (Canada) Ltd. have climbed between 8 per cent and 15 per cent since August, while Canadian Tire Corp. Ltd. and Tim Hortons Inc. barely budged.

The S&P/TSX consumer discretionary sector is up about 2 per cent since August and only 5.9 per cent on a year-to-date basis. However, the index climbed 30 per cent from its low set early this year.

Shares of Canadian Tire are up from early this year as worries over the health of the economy, the financial sector and credit cards abated, said James Cole, a senior vice-president of Portland Investment Counsel Inc. (formerly AIC Investment Services) and portfolio manager for AIC Canadian Focused fund. He has recently reduced his holdings in Canadian Tire after making it a significant bet in late 2008 and early 2009 when the company was under selling pressure.

He is now switching directions, buying food retailers Loblaw Cos. Ltd. and George Weston Ltd., which have been lagging the stock market dramatically. "People are selling the defence and buying offence," Mr. Cole said. "I'm going the other way."

He also likes relatively stable and predictable businesses such as Shaw Communications Inc. and Rogers Communications Inc. Investors are worried about the increased wireless competition, but the incumbent Rogers will prevail, he said.

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