The base metals sector warrants increasing investor attention as industrial output rises in Asia and prospects grow for a year-end rebound in North American production, notes a new report from CIBC World Markets Inc.

“Industrial activity is indeed already picking up, not in green shoots in North America, but in bamboo shoots in East Asia,” says Avery Shenfeld, chief economist, in his latest Canadian Portfolio Strategy report. “Factories there are sparking back to life.”

China appears to be first in the region to have turned the corner, notes Shenfeld, with its rising metal imports and fixed asset investment, and an uptick in the country’s Purchasing Managers Index.

And there are signs elsewhere in East Asia that factories are “beginning to edge back into gear” with production in Japan rising 1.6% in March, the first material gain in 10 months. Estimates for April and May see monthly increases of 4.3% and 6.1% respectively. Meanwhile, industrial production in Korea posted a 4.8% monthly gain in March on top of a 7.1% rise in February.

The easiest way for Canadian investors to play these signs of recovery is to add exposure “to sectors that tend to be early movers in an industrial production recovery,” says Shenfeld. He suggests investors look at non-energy commodities, particularly base metals.

“Base metals historically have been among first resource-space movers, meaning that related equities have historically tended to outperform the market in the late stages of recession and early in recovery.

“Although the base metals sector has been one of the markets’ best performers of late, stocks are still trading about 50% below levels reached during the boom,” adds Shenfeld.

Also supporting base metals demand is “an Asian-centric recovery driven by infrastructure spending,” says Shenfeld. “China’s $586 billion stimulus package is focused on housing and infrastructure, including railroad and grid expansion – highly metal-intensive areas of activity.”

Elsewhere in the report is a favourable outlook for Canadian financials where Shenfeld says the “cloud of uncertainty weighing on the sector (is beginning) to lift.”

Canadian financials still face a tough year for credit performance, he notes, but “the doomsday scenarios that took financials down to six-year lows are looking increasingly unrealistic, removing a serious downside risk.”

As for the broader outlook for equities and the TSX, Shenfeld believes “we’re in the early stages of a bull run.”

Investors could see a breather or partial pullback on soft economic news in the quarter ahead but Shenfeld notes “there’s enough medium-term upside” to be benchmark-weighted in stocks. “Because ultimately, the market is right in anticipating earnings growth in 2010 and beyond, even if headwinds associated with earlier excesses in lending leave the first year of a global recovery running at a tepid pace.”

The “waning months of recessions have historically been a good time to hold stocks,” he says, adding that “there remains ample headroom for a multi-year bull market ahead.”

IE