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“When we look across the market to find opportunities, it’s harder now than it was a couple of years ago,” says Brandon Snow, principal and co-chief investment officer with Cambridge Global Asset Management, a unit of CI Financial Corp. in Toronto.

The main drivers of growth in Canada’s economy – which is expected to expand by an estimated 2%-2.5% – will be consumers, exports and business investment, says Craig Fehr, investment strategist with Edward D. Jones & Co. LP in St. Louis. Fehr notes that the latter two categories, exports and business investment, have been largely absent in the economic recovery that began after the downturn of 2008-09.

However, the recent, steep slide in oil prices introduces a large element of uncertainty: while lower oil prices could have a negative effect on the energy sector, groups that buy oil-related products – other industries and consumers – could be the beneficiaries of lower prices for energy.

Alex Lane, vice president and portfolio manager with Dynamic Funds, a division of 1832 Asset Management LP in Toronto, believes that most growth in 2015 will come from sectors other than commodities and materials.

Here’s a look at Canadian investing sectors in more detail:

– Consumer staples. Investment fund portfolios are largely overweighted in this sector as the grocery price wars slow down and synergies and other benefits from past acquisitions begin to appear. Between the two main grocers, Loblaw Cos. Ltd. and Metro Inc., Loblaw is the favourite.

“We think the integration of Shoppers [Drug Mart Corp.] is an added benefit and not fully reflected in [Loblaw] stock,” says Mark Pugsley, vice president of equities with Standard Life Investments Inc. in Montreal. He adds that the price of food is rising, which allows grocers to increase their margins.

However, Justin Flowerday, vice president and director with TD Asset Management Inc. in Toronto, thinks that grocery stocks are too expensive, so he’s looking elsewhere. He sees growth potential for Saputo Inc. and Alimentation Couche-Tard Inc., both of which have a good track record with acquisitions at home and abroad.

– Consumer discretionary. On the whole, investment funds are overweighted in this sector – despite the higher valuations – because of the improving economy.

One firm in this sector that has benefited from improving economic activity and the resulting growth in auto sales is Magna International Inc. In the coming year, that company also could see higher margins in Europe, says Darren Lekkerkerker, portfolio manager with Pyramis Global Advisors, a unit of Boston-based FMR LLC (a.k.a. Fidelity Investments). Magna has little debt on its balance sheet, which allows stock buybacks and acquisitions.

However, Pugsley, is cautious about Magna. He notes that while the company still will have operating leverage – every dollar in sales will increase the firm’s earnings – that won’t be as much as in the past.

Lane, for his part, likes Hudson’s Bay Co. because its real estate holdings are not fully reflected in the share price.

Flowerday favours cable and publishing group Quebecor Inc. While this company is classified as consumer discretionary, Flowerday considers Quebecor to be a telecommunications company because of its plans to expand its wireless business. “You have Rogers, Telus and BCE,” he says. “Quebecor is going to be the fourth major player.”

Other firms in this category of interest include Dollarama Inc. and Gilden Active Wear Inc.

– Telecommunications. This sector is viewed as being overvalued and thus is underweighted.

Lekkerkerker is skeptical of this sector because telecom is capital-intensive and smartphones are reaching a saturation point. Also, he’s concerned about government regulation.

However, Flowerday sees value in Telus Corp. because of its reputation with consumers: “It might be the one phone company that people don’t hate.”

Fehr recommends Rogers Communications Inc., largely because of its size – it is the largest wireless player and second-largest cable operator in Canada.

– Information technology. Opportunities in the U.S. are preferred in this sector. However, one large player in Canada that draws attention is CGI Group Inc. Lane says CGI is a strong business but is undervalued because it does not pay dividends.

Pugsley likes OpenText Corp. because of its move toward selling products as a suite rather than individually.

– Health care. The outlook for Canadian health-care companies is mixed. Fehr, for example, prefers to invest in U.S. stocks in this category: “You can’t really get meaningful exposure in high quality companies in Canada.”

But others, such as Lekkerkerker and Lane, are very bullish on some Canadian companies, particularly the dominant players – Valeant Pharmaceuticals International Inc. and Catamaran Corp. – which both portfolio managers believe are misunderstood by the street. Investors were soured on Valeant after its aborted acquisition of Allergan Inc. in 2014.

But Lekkerkerker thinks other acquisition opportunities will emerge and, in the meantime, he views Valeant as a well-diversified company with strong management.

Weaker than expected results at the beginning of 2014 also dampened enthusiasm for Catamaran, a pharmacy benefit manager. But Lane believes Catamaran will benefit from the expected rise in prescription medications for baby boomers and the use of generic drugs.

– Utilities. The utilities sector continues to be out of favour and underweighted in most investment fund portfolios.

“A lot of the pipelines and industry names have seen some significant amounts of [money] flooding into them, revaluing them up[ward],” says Snow.

Although the utilities sector is not popular, there still are some good opportunities. Flowerday, for example, sees value in Brookfield Infrastructure Partners LP because of its prudent approach to debt. Other preferred companies include Enbridge Inc., FortisBC Inc., Emera Inc. and TransCanada Corp.

– Industrials. The outlook for this sector is bullish, and industrials are overweighted in many investment funds. However, volatility in the near term is a concern.

The big players in this sector are railway companies; although these firms are expensive, the potential for a little more appreciation exists. Lekkerkerker likes Canadian Pacific Railway Co., which he believes will benefit from an improving U.S. economy, increasing volumes and better cost management.

Flowerday sees value in the Canadian National Railway Co., although he admits that growth is likely to be limited.

Lane agrees that the fundamentals of the railways are solid. However, he is less interested in these stocks in the near term because of lower oil prices and a probable slowdown in demand for bulk commodities, which typically are shipped by rail.

Lane prefers truck stocks, particularly TransForce Inc., which has improving margins, large cash-flow generation and the potential for future acquisitions.

Small-caps still offer opportunities

Canada’s small-capitalization equities sector is likely to be a stock-pickers’ market in 2015, as valuations in non-resources sectors continue to climb.

“We’re a little more tempered in our expectations because people have rotated out of those energy [and] materials-type sectors and moved into [non-resources sectors],” says Aubrey Hearn, vice president and senior portfolio manager with Sentry Investments Inc. in Toronto.

Here are a few small-cap names that are of interest to portfolio managers this year:

In consumer discretionary, Hearn sees value in Winpak Ltd., a packaging company. “It’s not super-cheap,” says Hearn, “but we do think it’s winning new contracts from competitors.”

Pugsley believes that K-Bro Linen Systems Inc., a laundry and linen service for hospitals and hotels, will continue to expand its business.

TWC Enterprises Ltd., which owns ClubLink golf courses, often is overlooked but has potential, according to Edwin Lugo, senior vice president and portfolio manager with Franklin Templeton Investments in New York.

“[TWC] does share buybacks,” says Lugo, “and there’s quite a bit of hidden value in some of the land that’s in the golf courses.”

In the health-care sector, Snow sees value in Knight Therapeutics Inc. Says Snow: “There’s a smart management team, good alignment [and] a lot of excess capital to put to work.”

In the industrials sector, Cargojet Inc. presents a good opportunity because of a recent deal with Canada Post Corp., says Hearn, which gives Cargojet a virtual monopoly in overnight delivery in Canada.

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