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The three sectors that will lead us out of recession

A positive feeling has crept back into the market with all major North American indices again showing signs of revival.

A positive feeling has crept back into the market with all major North American indices again showing signs of revival. The TSX, Dow, Nasdaq and S&P indices are all up more than 20 per cent from their March 9th lows. Investors have shifted from survival to re-positioning to try and take advantage of the rebound in North American stocks.

Many “bear” analysts have said that the most recent run-up is not based on anything factual. These analysts speak about the highest unemployment rate in the United States since 1982, a still paralyzed banking sector, and a government stimulus package that is destined to fail in order to prove their point. The “bull” analysts, of which I am one, point to a roughly US$800-billion stimulus package which is just starting to get out into the public, record-low interest rates, tax cuts, relatively low oil prices and the 20 largest industrialized nations in the world set to spend up to $1 trillion to get the world economy moving again in order to prove their point. I cannot comprehend how any analysts can be negative on the future.

If negative investors claim the most recent run-up is not based on anything sustainable, then the “bulls” can argue that the majority of the damage done to the value of markets was based on fear, and is itself not factual. Many have said that this crisis is one of investor confidence, which suffered as the markets fell. What is needed is for their confidence to rebound is comfort that the worst is over and the market will rise once again, which is exactly what has happened over the past four weeks.

As an investment adviser, I will say that investors should not expect the market to go straight up from this point forward. You can be sure that there will be many pitfalls and pullbacks along the way to getting us back to our prior highs. What I do believe has happened recently is that a lot of the uncertainties regarding government aid have been removed both here and in the United States. Governments have explained their various programs and the course of action it will take to cure the financial system and the North American economy as a whole. However, two unknowns that still remain are what will happen to GM and Chrysler and when the auction for the U.S. banks' toxic assets will take place -- two major pieces of the recovery puzzle that are well on their way to completion.

One thing to remember is that the stock market does not like uncertainty. Whether the news is good or bad, investors want to know. They can then figure out the best way to deal with the problem. When an uncertain situation lingers on for weeks or months, that is a worst case scenario that stock markets will suffer under. The recent 20 per cent run-up (market increases more than 20 per cent considered a bull market) is due to more clarity in the stock market and more information on how things will work in the future

Therefore, with the governments strategy firmly in place and the worst of the downturn possibly over, what sectors of the market will lead us out of this recession? Even though I always believe in diversification and that investors should always be diversified to spread out the risk as best as they can, especially in these current conditions, if an investor is restructuring or investing new cash, the three sectors of the market I would look to slightly overweight at this time are oil, financials and infrastructure. The oil sector has fallen substantially from its highs and it appears that cutbacks in the availability of oil should start to be felt around the world. The financial sector led everyone into this recession and it is only fitting that it leads us out. A low interest rate environment will help banks realize significant gains and help the sector recover. Lastly, infrastructure is the area of the economy that will be receiving the most aid from governments around the world. There will be many companies benefiting from the enormous amounts of government spending set to take place. These three sectors will play a significant part in the rebound from the worst recession most of us have experienced in our lifetime.

If you have any questions regarding the above article and what financial, oil or infrastructure buys make sense or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!

Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.

 
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