Tuesday, August 29, 2006

Gloomy Growth Forecast May Spark Flight to Quality

The Globe and Mail, Carolyn Leitch, 29 August 2006

The flock of investors putting money into high-quality assets could turn into a flood as people grow increasingly pessimistic about the global growth picture, predicted Scotia Capital strategist Vincent Delisle.

In Canada, the strategist has "overweight" ratings on the financials, telecoms, industrials and consumer staples groups on the S&P/TSX composite index.

Names in his recommended portfolio include Royal Bank of Canada, Toronto-Dominion Bank, Alimentation Couche-Tard, Rogers Communications Inc., Nexen Inc., Barrick Gold Corp. and TransAlta Corp. Mr. Delisle said the "flight to quality" began in late April as investor psychology shifted from overoptimistic to outright gloomy and stock markets around the globe began to crumble. He says more people adopted the view that rising interest rates in many parts of the world will drag down corporate profit growth.

Suddenly, asset classes that have been shunned since 2004 are back in favour. As a result, bonds have been keeping pace with equities, large capitalization stocks are outperforming small caps, and defensive sectors are leading, he said.

Mr. Delisle noted that flat-to-inverted yield curves in bond markets around the world are signalling slower growth ahead, but corporate bond spreads have yet to move higher. When that occurs, the flight-to-quality trend should intensify, he forecasts.

In stock markets, meanwhile, defensive and interest-sensitive names are appreciating. Health care, utilities, energy, consumer staples, telecommunications and financial services are the winners this quarter on the Standard & Poor's 500-stock index.

Mr. Delisle expects the U.S. economy to lose steam over the next few quarters after two years of raising interest rates by the U.S. Federal Reserve Board, along with today's rising mortgage rates, surging energy prices and deteriorating housing market.