The unprecedented erosion of stock market value in recent months has created enormous buying opportunities for investors, and while more short-term declines are possible, returns in the next three to five years will be hefty, portfolio managers said on Thursday.

Speaking to financial advisors and investors during a Web cast, Joe Canavan, chairman and CEO of United Financial and Assante Corp., said strong recoveries that have followed historical market crises indicate that a market resurgence is on the way.

“We see this as a time of significant opportunities in the next three to five years,” Canavan said.

Financial companies currently represent a particularly attractive investment, he said.

“Financials are severely undervalued in many instances,” he said, noting that some companies’ shares are down between 70% and 90% from their peaks.

Daniel Bubis, the president and CIO of Tetrem Capital Management, said current stock valuations represent some of the best buying opportunities in 50 years.

He encourages investors to buy stocks of companies with strong balance sheets, and to avoid companies with too much leverage.

As an example, Bubis said the Big Five Canadian banks represent solid investment opportunities since they are well capitalized.

“They’re fairly bullet proof,” he said, adding that Canada’s banking system is currently the most solid system worldwide.

He warned that in the next few months, the banks’ stocks could face a rough ride since their earnings are being hit by the challenging economic environment.

But he added that the banks’ earnings in recent years have been unusually high, and any softening would bring them down to a level that’s still solid, and more sustainable.

Bubis warned that as a value manager, he is cautious about the Big Five bank shares since they are still trading at a premium to their book value. He noted that in previous bad credit cycles, bank shares have traded down towards book value.

Ulitmately, however, he said their book value would grow, creating strong long-term potential.

Many buying opportunities also exist among American financial institutions, according to Christopher Marx, senior portfolio manager at AllianceBernstein L.P. He said some of the government’s liquidity efforts have successfully alleviated pressures on the banks, setting the stage for strong performance.

“From a value manager’s perspective, this is an extremely attractive market,” said Marx.

He pointed to Citigroup as one example, which is currently trading at between 33% and 40% of its book value.

Other sectors showing strong potential buying opportunities include energy, technology, and pharmaceuticals, according to the portfolio managers.

While oil and other commodity prices could continue to fall, any erosion below current prices would be short-lived, according to Bubis.

“It would be very temporary,” he said. “Eventually demand will recover.”

In considering market conditions in the months ahead, Canavan said the bear market is not likely to last much longer. Historically, the average bear market ranges from 12 to 15 months, and the current one has already lasted for 14 months, he noted.

“I think that bodes well for us.”

The portfolio managers also noted that credit market conditions are beginning to improve, which is positive for the economy going forward.

“You’re seeing credit gradually coming back,” said Bubis. But he noted that banks are re-pricing their loans and demanding higher spreads to lend in what they perceive as a riskier environment.

This is part of an adjustment process that will ultimately see the price of loans settle at a level higher than the “absurdly” low levels they reached prior to the credit crisis, according to Marx. “We need to find the equilibrium.”

IE