Although market volatility is likely to continue in the months ahead, financial advisors should encourage clients to remain invested in stock markets, and particularly in defensive sectors and U.S. blue chip stocks, executives at BMO Financial Group (TSX:BMO) said on Tuesday.

At a panel discussion in Toronto, Rajiv Silgardo, co-CEO of BMO Global Asset Management, warned that extreme market swings show no signs of abating.

“I believe this turmoil is here with us for the foreseeable future,” Silgardo said, noting that politicians in Europe are struggling to agree on a resolution to the ongoing sovereign debt problems.

The resulting market volatility has fuelled a “rush to safety” that has seen retail investors flock to fixed income investments in unprecedented numbers, the panelists noted. Stéphane Rochon, vice president and managing director of BMO Nesbitt Burns, said he believes the surge in demand for government bonds, in particular, has entered bubble territory.

“Bonds are extremely expensive,” Rochon said. “It feels to me that we are entering the final phase of a great bond bubble.”

Although clients may be tempted to continue buying bonds in the current environment, advisors should ensure clients don’t shun equities, the panelists said. In fact, Rochon recommends an overweight in equities in the current environment.

Specifically, the executives at BMO favour such defensive sectors as telecommunications, utilities and consumer staples.

“We’re reluctant to go significantly pro-cyclical,” said Paul Taylor, chief investment office at BMO Harris Private Banking and BMO Global Asset Management. He added that the investment team at BMO is being highly selective in its foray back into equity markets.

Due to the inherently cyclical nature of the Canadian stock market, Rochon urges investors to look to the U.S. market for equity exposure.

“The U.S. market is a much more defensive and balanced market than the Canadian market,” he said. “Canadian investors need to increase their exposure to the U.S. market. It simply has a depth of investment opportunities which are not present in the Canadian market.”

In particular, Rachon likes large blue chip stocks such as PepsiCo Inc. (NYSE:PEP), Apple Inc. (NASDAQ:AAPL) and Microsoft Inc. (NASDAQ:MSFT).

Adding to the appeal of the U.S. market are signs of improvement in the economy. Rochon said he’s encouraged by recent economic indicators south of the border, including an upward trend in the Institute for Supply Management’s New Orders Index.

“Economic momentum is still trending in the right direction in the U.S.,” he said.

Rochon also sees positive signs in the U.S. housing market. He pointed to data showing that in 70% of the most important U.S. markets, house prices are either flat or rising.

“We think this could be one of the most important themes over the next few years,” he said, noting that a strong housing market tends to have positive implications for the entire economy. “As home wealth goes up,” he explained, “consumers increase their propensity to spend.”