With the economy on its way towards a sustainable recovery, cyclical equities are poised to perform well in the months ahead, according to Paul Taylor, chief investment officer of BMO Harris Private Banking.

On a conference call discussing his investment outlook on Wednesday, Taylor said a sustainable economic recovery will likely get underway in the next 12 months. He said he has seen a clear change of direction in the leading economic indicators, and he expects the confidence of consumers and businesses to pick up in the months ahead.

Under this scenario, Taylor expects economic growth of 2.5% in the U.S. and roughly the same, or slightly higher growth in Canada.

Taylor is bullish on equities, particularly those in cyclical sectors, as economic growth returns.

“We’re looking to continue to average into the cyclical sectors and away from the more stable value sectors,” he said. In particular, Taylor said he is focused on reducing exposure to utilities, consumer staples and health care, and buying stocks in technology, consumer discretionary, materials and energy sectors.

But Taylor warned that there remains a real possibility that the downturn will turn into a double-dip recession. This scenario would involve another recession in the latter part of 2010.

“We need to be mindful of the potential that this fragile recovery, that is based on this very elusory emotion of confidence that has sort of seeped back into the market, potentially could disappear overnight,” he said.

Based on this risk, Taylor said the investment team at BMO Harris Private Banking remains prepared to “meaningfully de-risk” their portfolios. But another significant risk, said Taylor, is that investors will become too conservative too quickly, and underestimate the longevity of the rebound so far.

Economic conditions south of the border also appear favourable for equities, according to Jack Ablin, chief investment officer at Harris Private Bank. He noted that momentum in the market remains

“We still believe that equities will be the prevailing asset class over the next four quarters,” said Ablin.

He pointed out that a hefty amount of cash remains on the sidelines, as investors remain cautious. But investor confidence has gradually improved throughout the year, Ablin noted.

“Now it’s a matter of reality versus expectations,” he said.

IE