Economic cycle close to

You have to admit, the past three years have provided a pretty good ride for Canadian investors. While energy, materials and financial stocks have rewarded Canadians for “staying home,” your clients probably shouldn’t become too complacent. Now could be the time to recall the old “buy low, sell high” maxim.

“Canada is a cyclically oriented market and a cyclically oriented economy,” says Bob Haber, chief investment officer at Fidelity Investments and portfolio manager of the Fidelity Canadian Disciplined Equity Fund. “You’re just getting closer to the red line — I don’t think you’re there, but you really need to pay attention.

“I don’t believe the cycle is done, but we have to watch closely. The risks have gone up. Over the longer term, I think these will be great sectors,” he says, referring to energy and materials. “But you get moments when they get ahead of themselves.”

He says Canadians initially failed to realize the strength of the global economic expansion which drove commodity prices through the roof, but eventually caught on and have made tidy profits as a result. The danger now is that these high commodity prices may not be sustainable, as they drag on the global economy.

“I think where we are now is higher risk for a couple of reasons,” he says. “We’ve had that great move that closed the valuation gap on some of those sectors and we have higher risk on the economic cycle, with the higher energy price creating a tax, in a sense, and with higher short term interest rates.

So where is a Canadian investor to turn? He says the Canadian dollar is now “quite expensive” and that investors need to focus less on value oriented stocks and more on growth — and with the pricey dollar, U.S. techs look attractive.

He reasons that globally, corporations have been very tight-fisted with their earnings over the past three to four years, as investors have demanded more capital to be returned in the form of dividends and share buybacks.

As a result, there has been little appetite for capital expenditures. But with the economic cycle maturing, corporations can be expected to invest in technology upgrades to boost productivity and competitiveness.

On the American markets, small and mid cap stocks have led among growth-oriented equities and Haber says large cap growth stocks have been left behind. There are notable exceptions, such as Apple Computer — thanks almost entirely to the iPod — and Google, but other large growth companies have spent this rally treading water.

Of course, the U.S. economy offers risks of its own. While the fiscal and trade deficits have yet to have the disastrous impact many have been predicting, American growth has been highly dependant on the consumer and their ability to manage their credit. Low interest rates have certainly helped, but after several rate hikes from the Federal Reserve, their resolve may be showing cracks.

Haber says the U.S. economy needs the consumer to “hold on” through 2006 to avoid a recession, after which corporate capital expenditures should offer some breathing space.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com