While broad Canadian equity benchmarks have shown extreme weakness of late, a new report from BMO Global Asset Management Inc. suggests that certain pockets within the stock market are showing relative strength.
The report, entitled ‘The Hidden Rally in Canadian Equities’, notes that weakness in the heavyweight energy and materials sectors have largely been responsible for recent market declines.
“Commodity intensive areas tend to be highly sensitive to economic conditions as they are widely used in construction and urbanization projects,” said Alfred Lee, vice president and investment strategist at BMO ETFs and global structured investments, and author of the report. “With increased political gridlock and macro-economic uncertainty, especially in the Eurozone nations, commodity and commodity-related areas have recently shown both weakness and increasing volatility.”
In contrast, he points out that the consumer discretionary, consumer staples, utility and telecom sectors have all gained against the Toronto Stock Exchange.
“So-called ‘low beta’ sectors, or those that are less sensitive to market movements, have been strong so far this quarter,” Lee said. “These areas, however, tend to be under-represented in major Canadian indices and also in the portfolio of many Canadian investors.”
Against these conditions, advisors should urge clients to consider adding exposure to less cyclical areas to reduce potential volatility that may arise, Lee said. However, he urges investors not to abandon commodities – especially considering that further stimulus could cause commodity prices to rally sharply.