TORONTO (Reuters) - A torrent of dire euro zone headlines has sent investors scurrying for the safer corners of the Canadian stock market, but now may be the right time to start rotating back into risk.
More clarity on the outlook for Europe, combined with possible action by the European Central Bank (ECB) and the U.S. Federal Reserve to boost the economy are just two of the factors that could lift those stocks most geared to growth, say many market watchers.
“Investors need to play both offense and defense ... they probably need to be adding the more cyclical sectors at this point, we just don’t think they should be at the same weight as (they are on the TSX),” said Kate Warne, Canadian market strategist at Edward Jones in St. Louis, Missouri.
“At some point the market responds to the fact that we’ve seen better economic conditions, strong earnings growth and that many of the things that are uncertain are not new and different.”
The Toronto Stock Exchange’s defensive sectors, which make up just a small part of the benchmark composite index .GSPTSE have been the best performers of 2011.
Telecom shares .GSPTTTS, which have seen revenues from traditional fixed-line phone or cable operations boosted by higher growth mobile revenues, have led the charge so far, rising 11 percent this year.
Consumer staples .GSPTTCS, which include companies such as drugstore chain Jean Coutu (PJCa.TO) and convenience store operator Alimentation Couche-Tard Inc (ATDb.TO), have been the next best performer.
Health care .GSPTTHC and utilities .GSPTTUT, two other traditional countercyclical plays, have also outperformed by posting gains in a falling market, as has the real estate
.GSPTTRE subgroup dominated by cash-generating real estate investment trusts (REITs).
Since its 2011 high of 14,329.49 hit in March, the composite has tumbled 13.4 percent and is down 7.7 percent from the end of 2010.
The highly cyclical energy and materials sectors - which make up nearly 50 percent of the market - have done worse, with energy stocks losing a full 13 percent.
But many think it’s the cyclical stocks, including financials, that look ripe for a medium-term recovery. While these economically sensitive stocks are prone to drop sharply in unfavorable times, they also tend to rebound faster when the news is good.
There were signs in the past week that investors were ready to latch on to any shred of optimism. Stocks jumped, for instance, after Greece backed away from a blindsiding proposal to hold a referendum on the euro-zone’s hard-won bailout package and when the ECB announced a surprise interest rate cut.
Gavin Graham, president of Graham Investment Strategy, said he’s betting on more monetary stimulus from Europe and the United States to further spur risk appetite. He also noted that October to April is historically a period of strong equity performance.
“Even if there was a default by Greece ... there will be a concerted effort on the part of the European government to print more money and to get growth going to stop the contagion spreading,” said Graham, who also expects that the Fed will announce yet another round of quantitative easing - creating new money to buy assets.
“The people who objected to the sort of quantitative easing measures previously have all gone quiet in the Fed council.”
Still, there’s not a widespread consensus to dump defensives for the allure of cyclical plays.
Some believe that dividend-paying telecoms like BCE Inc (BCE.TO), Telus (T.TO), and even some higher-yielding financials and industrials, remain the best game in town because the macro landscape is changing too quickly for bold moves in any direction.
“It’s too early to get more aggressive, it’s too late to get meaningfully more conservative. We’ve said focus on quality, focus on income and yield,” said Paul Taylor, chief investment officer at BMO Harris Private Banking.
“It’s an environment where as someone said ... investors are likely to continue to look for stocks that look like bonds and bonds that look like stocks.”
Others argue that the strategy of picking sectors in this uncertain and volatile environment is of little use.
“The bottom line is given the kinds of global macro headwinds and tailwinds we are likely to get, the only answer really for an investor who is benchmarked to the TSX is to have a balanced portfolio,” said George Vasic, equity strategist at UBS Securities Canada.
“Anything that is imbalanced is a call on the macro economy, which investors or portfolio managers or anyone are not well-equipped to do.”
Editing by Jeffrey Hodgson and Peter Galloway