Investors may continue to be skeptical about equities, but in 2011 they’ll be rewarded for having exposure to cyclical investments, strategists at the Bank of Nova Scotia said on Tuesday.

During the bank’s economic and market outlook conference in Toronto, Vincent Delisle, portfolio strategist at Scotiabank, said investors would be wise to add equities to their portfolios.

“Investors want to buy bonds. They want to buy comfort right now,” he said. “But markets, especially cyclical markets – equities, commodities, have been materially upstaging the level of sentiment here, and I think that will continue to be the case in 2011.”

Delisle noted that the Toronto Stock Exchange has produced returns of 15% so far this year, while the S&P 500 returned 12%.

Scotiabank forecasts that the S&P/TSX composite index will hit 14,000 in 2011, and that the S&P 500 will hit 1,325. Delisle explained that top-line growth will support earnings growth next year.

He considers equity markets undervalued, but he said Canadian stocks are somewhat expensive relative to those abroad.

“Relative to the U.S. and the rest of the world, Canada’s probably at the heftiest premium that we’ve seen in many, many years,” Delisle said. He noted that foreign investors have been aggressively snapping up Canadian stocks and bonds recently.

The bank’s strategists expect cyclical sectors such as energy, industrials and technology to perform particularly well in 2011. But they warned that market volatility is set to continue.

“This is not your buy-and-hold type market,” Delisle said. “This volatility points to a much more tactical investment strategy, and I think 2011 will be as volatile as what we’ve had in 2010.”

Furthermore, investors will continue to see global divergence. Although economic growth in emerging markets is vastly outperforming developed markets, Delisle said emerging market equities won’t necessarily outperform.

He pointed out that China’s stock market has posted negative returns so far in 2010. This trend could continue if China continues to take measures to keep inflation in check.

“The U.S. is trying to do everything it can to stimulate growth,” he said, “China is still talking about further tightening.”

“The Chinese stock market could underperform,” Delisle concluded.

Still, Warren Jestin, chief economist at Scotiabank, emphasized the need for investors to incorporate emerging markets into their investment strategies.

He expects GDP growth of 8% to 10% in China and India over the next three to five years. That compares with growth of 2.5% in Canada and the U.S., and 1.5% in Europe.

“We’re going into a world of different types of opportunities – opportunities that are in the emerging world,” he said. “What we have to do to take advantage of those opportunities is stop doing things that are familiar, sticking with the old strategies, and start investigating the unfamiliar.”

Jestin expects continued growth in emerging markets to drive commodity prices higher. He predicts that oil will average a price above US$90 per barrel next year.

IE