What’s hot and what’s not on the markets

Equity markets have underwhelmed in recent weeks, so here’s a look at what’s hot and what’s not when it comes to stocks—and why emerging markets might represent a good buying opportunity for investors.

Last week, the TSX dipped 0.5% as healthcare and energy lagged, while the S&P added 1.2% with gains in telecom, technology and industrials. The TSX is down 1.2% year-to-date while the S&P is up nearly 9%.

That makes Canadian stocks decidedly not hot, says Robert Kavcic, BMO senior economist, in a weekly equities report. Canadian stocks’ relatively poor performance not only reflects the TSX’s lack of exposure to tech and consumer discretionary but also trade uncertainty, he says.

In contrast, tech stocks are hot.

“Technology is still the place to be, with the sector steadily outperforming the S&P 500, up 19% on the year,” says Kavcic in the report. “The Nasdaq is just off a record high, climbing its 50-day moving average since the spring.”

In the warm category are rate-sensitive and defensive stocks, with consumer staples and utilities topping the S&P 500 over the last three months, says Kavcic.

These firming sectors possibly reflect the idea that peak growth is now priced in, he says, “but 10-year Treasury yields are holding firm right around the 3% mark, little changed from three months ago.”

Read: The yield curve and the next recession

Within consumer staples, consider food retailer stocks to get a boost as food producer and consumer prices diverge. “Consumer prices tend to be sticky and therefore don’t always echo moves in producer costs,” says a weekly CIBC economics report. “Indeed, recent declines in U.S. producer food prices, which are in part due to a stronger USD, have not been passed on to consumers.” That situation is expected to be a positive development for grocers, the report adds.

The coldest stocks currently are emerging markets stocks, says Kavcic, who cites reasons such as the Fed raising rates, global growth moderating and trade tensions increasing. “China, for example, is down almost 20% on the year, while others like Turkey and Argentina fall under the weight of their own domestic issues,” he says.

Upside for EMs

Despite woes in some emerging markets, equity investors should feel confident engaging with the space so long as they’re selective about where they invest, says Matthew Strauss, vice-president of portfolio management and portfolio manager at Signature Global Asset Management, in a video blog.

“Probably country selection will be as important, if not more important, than stock selection in this time of uncertainties and risk,” he says in the video. Monetary policy normalization in the U.S. and Europe into 2019 are factors. 

On the positive side for China, policymakers are sensitive to how economic reforms affect growth, he says. There’s also evidence of bond issues by local authorities to raise capital for infrastructure spending.

He suggests looking for  solid picks in Asia where countries exhibit strong economies and don’t rely on foreign financing.

Read: Economic impact of China’s environmental strategy

Another reason to invest in emerging markets is for diversification. While emerging markets and Canadian equity markets have historically been heavily tilted toward commodities, “this relationship looks a lot different today,” says Regina Chi, vice-president and portfolio manager at AGF Investments, in a blog post.

Technology transformation in emerging markets has pushed companies onto the global centre stage, says Chi.

“The information technology sector now boasts the biggest weighting on the MSCI Emerging Markets Index, increasing to 27% from 10% a decade ago,” she writes. “This compares to the weighting of energy and materials companies that have fallen to 15% over the same period.” Energy and materials made up almost 30% of the index in 2008.

As a result, there’s less correlation between Canadian and emerging markets equities, so investors exposed to both markets will have portfolios that are better diversified.

Chi’s bottom line: “Emerging markets equities represent a long-term secular growth opportunity fueled by a rising middle class that is dominated by emerging Asian countries and a positive GDP differential [versus] developed markets.”

With emerging market equities trading at double-digit discounts to Canadian and U.S. equities, “now may be an attractive time to buy in,” she says.

Read the full reports from BMO and CIBC. See the full posts from Signature Global Asset Management and AGF.