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(Reuters) - Strategists at two of Canada's top independent wealth managers say the time may be right to invest in companies that make cars, consumer durables and even industrial equipment like rail cars, as aging fleets and inventories spur a replacement cycle.
After a long consumer and corporate pullback, spending has begun to bloom again on big-ticket purchases, offering investment opportunities for Canadians looking to pump up portfolio growth with careful stock picks.
"The delay in purchasing new vehicles ... is going to start paying dividends over the next three or four years. You could see peak earnings for these companies in the next three or four years and as a result you should probably be buying them now," said Douglas Rowat, vice-president of research and strategy at Raymond James in Toronto.
Buying into industrial or consumer discretionary sectors can be risky since both are both highly sensitive to the economy, Rowat says, but significant replacement pressures mean many consumers and companies have painted themselves into a corner and simply have to renew key durables that they allowed to age during the recent recession.
"Whenever you get a consumer item or product that is bumping against its useful life, you can anticipate three to four years of strong sales growth and demand for new product," Rowat said. "I think the growth in the economy will just be an accelerant to the growth that is already going to play out."
It's a strategy his counterpart at Macquarie Capital Markets is also eyeing. David Doyle, the firm's North American economist and Canadian strategist, said the U.S. consumer is starting to regain confidence, while Canadian corporations are showing a renewed willingness to spend.
"There are a few signs the consumer is starting to come back," he said. "One of the main ways that will manifest is through increased auto purchases. The aggregate fleet of autos in the U.S. is at a relatively high age at this point - so the replacement cycle is likely to come to the forefront."
With the average U.S. automobile approaching 11 years old - having increased for 10 years in a row - vehicles are either over or near the upper end of their useful life, Rowat said.
That bodes well for growth at automakers and parts producers, and Rowat recommends buying stocks such as Canada's Linamar Corp (LNR.TO). His U.S. picks include Ford Motor Co (F.N), Cummins Inc (CMI.N) and Delphi Automotive (DLPH.N).
Boats, while more discretionary than cars, are a $30 billion global business dominated by the North American market, according to Rowat. With an average boat age of 21 years in 2010, suppliers are anticipating replacement pressure. Retail sales of new fiberglass boats in Florida and Texas are already growing for the first time in many years, Rowat said.
His investment picks? Brunswick Corp (BC.N) and MarineMax Inc HZO.N - companies that have yet to regain even half the value of their 2004 to 2006 heyday.
Macquarie's Doyle sees a few timing issues in the months ahead, as a fiscal tightening by the U.S. government likely constrains spending in the first half of 2013. The probable end of a payroll tax cut and a corporate depreciation write-off may depress appetites early in the year, but confidence will return in the second half, rewarding investors who bought in the trough.
"I think you get that slowdown in consumer spending in the first half of 2013, but I don't think it's enough to push the U.S. into recession," Doyle said. "If you start to see weakness during the time period it could actually be a good buying opportunity for an investor if you wanted to play a rebound in the replacement cycle in the second half of 2013."
Aside from the auto sector, Doyle said a rebound in consumer spending would lift U.S. consumer discretionary stocks and retailers like Macy's Inc (M.N).
Still, he is less confident about the Canadian consumer, whose debt loads are reaching record highs and who will likely be forced to deleverage just as the U.S. consumer is regaining strength. The Canadian corporate sector is in better shape and more likely to drive a replacement cycle on this side of the border, he said.
"If you're going to be playing the replacement cycle, due to the high consumer debt levels I'd steer clear of any stocks leveraged to the consumer replacement cycle. It's more likely to benefit from companies on the corporate side, industrial-type companies," Doyle said. He believes Canadian infrastructure development companies will benefit from investment in commodity-rich provinces as growth stabilizes in emerging markets.
On the industrial side, Rowat said the U.S. fleet of about 1.4 million rail cars is flirting with an average age of 25 years, and industry orders and deliveries have continued to ramp up since early 2011. He looks to stocks like American Railcar Industries Inc (ARII.O) and Greenbrier Cos Inc (GBX.N) to benefit.
"It's simply a fact that many of these companies don't have an option anymore. They need to have new rail cars, or, for the consumer, they are going to want a new boat or a new car."
Reporting by Andrea Hopkins; Editing by Gary Hill