Canada's banks may still be best TSX bet for 2012

Sun Jan 8, 2012 1:48pm EST
 
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By Jon Cook

TORONTO (Reuters) - Canada's famously conservative banks, hit last week by a high profile downgrade, may still be the least bad option for Canadian investors in what could be another ugly year for stock markets.

The financial sector, whose shares outperformed the overall market in 2011, are unlikely to fall much, and yet have the potential to profit from any market recovery, analysts say.

"The place that is most right, right now, is in the financials sector," said Rick Hutcheon, president of RKH Investments. "That's where the game will be."

In 2011, the worst year for equity investors since the 2008 global meltdown, the overall market fell by 11 percent while financials were down 7 percent. Bank stocks were largely flat.

But the financial issues, which account for nearly 30 percent of the value of Toronto Stock Exchange's S&P/TSX composite index .GSPTSE, were in the spotlight last week when a well-known industry analyst downgraded the sector and predicted the three top lenders would see their shares decline in 2012.

Barclays Capital analyst John Aiken forecast an end to the double-digit profit growth that has powered the banks since the financial crisis.

Yet less-bearish observers said risks from Europe's debt crisis and other external threats make banks a wiser investment than more volatile energy and mining stocks. And traditional safe haven plays like telecoms and health care offer little upside after also outperforming the broader market in 2011.

BANKING ON BANKS   Continued...