Time to buy into cyclicals
Canaccord's call: Resource sectors now poised for major turnaround
Steve Maich -- Financial Post
Investors are being handed the kind of chance that only comes around every five or 10 years to profit from a breakout in cyclical resource stocks, according to Nick Majendie at Canaccord Capital Corp.
Eight months of interest rate cuts are poised to finally bring about a turnaround in the North American economy and Canaccord strategists are rebuilding their portfolio allocations to take advantage, Mr. Majendie said yesterday.
He is easing away from banks, top performers in the past few years, as well as bonds and moving heavily into mining, forestry, gold and oil and gas stocks.
"You want to be buying when the outlook looks worst," Mr. Majendie said.
"We should start to see evidence of economic improvement in the fourth quarter, and then equities markets will begin to anticipate more improvement."
Metals, mining and forestry stocks are referred to as cyclicals because they tend to follow the broad cycle of the economy. The stocks are often the first to rise when optimism returns to the economy and are typically the first to fall when economists sense trouble on the horizon.
Cyclical valuations are now near lows hit during major market bottoms in 1970, 1974 and 1982, according to Canaccord. Integrated mining stocks are now trading at an average valuation of 5.8 times 2001 cash flow. At the lowest point of the last economic slowdown, in summer of 1998, the group bottomed out at 8.5 times cash flow, he said.
Canaccord is projecting the integrated miners could rise about 40% in the economic rebound, assuming they return to a multiple of just 7.9 times. Similarly, the TSE gold and precious metals index could rise 30% based on a return to past valuations, Mr. Majendie said.
Some of the key changes in Canaccord's portfolio include going triple overweight in mines, minerals, golds and forest products as compared to the TSE 300, while cutting exposure to interest-rate sensitive investments, such as bank stocks.
Some of Canaccord's top picks are conglomerate Canadian Pacific Ltd., and gold stocks Barrick Gold Corp. and Placer Dome Inc.
The wildcard in the firm's rebound scenario is the strength of the U.S. dollar.
Because most commodities are priced in U.S. currency, small declines in the greenback directly boost prices. But if the U.S. economy and markets continue to deteriorate, a serious slide in the dollar could throw North America's economy and stock markets further off the rails.
Other money managers think Mr. Majendie is jumping the gun. John Kinsey, a portfolio manager at Caldwell Securities Ltd. in Toronto, said it's still too soon to bet on a resurgent economy.
"I think you have to exercise as much patience as possible," he said. "People said there would be a first quarter recovery, then second quarter, then second half. Well we're halfway through the third quarter and it still looks pretty bleak."
Yesterday's 25-point interest rate cut by the Bank of Canada came with some of the Bank's most bluntly negative comments on the economy in years.
Bank of Canada Governor David Dodge backed off earlier predictions that the economy would return to normal growth in the second half of this year, and left the door open for more cuts this year.
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