Market outlook for sector investing strategies

When you buy stocks in sectors and sub-sectors of the market, keep your goals in mind. If you’re a conservative, income-seeking investor, focus on utilities, financial stocks and consumer stocks. If you’re aggressive, buy more manufacturing stocks and resource stocks.

Four times a year, we make short-term predictions. We do a 180-day forecast for the economy and stocks. We pick 25 stocks expected to beat the market over that period and 25 stocks expected to lag behind the market.

In 2016, Canada’s GDP is expected to grow by 1.6 per cent. (GDP, or Gross Domestic Product, is the value of the goods and services produced in a country over the course of one year.) This is according to The Economist. It relies upon multiple forecasts.

As a general rule, we advise you to keep at least 10 per cent—but no more than 30 per cent—in each of the five main economic sectors. Remember, too, that within any given sector or sub-sector, individual stocks will perform differently from one another.

Here’s our outlook for the next six to twelve months for the five main sectors and their sub-sectors. Our long-run outlooks can differ from our short-run outlooks.

Best sectors to invest in now

We now expect the banks to beat the market. They’re cheap and pay high, rising, dividends. Speculators will cover big short positions. We still expect mutual funds to lag due to competition. We still expect insurers to match. Low interest rates keep liabilities high, but the insurers are growing abroad.

We expect gas and electric utility stocks to outperform, as interest rates are low and they pay high and rising dividends. We still expect pipeline stocks to match the market. They face opposition but are earning and paying more. We still expect telephone stocks to outperform. They’re earning and paying more.

We expect building materials stocks to outperform as low interest rates support U.S. and Canadian construction. We expect chemical stocks to lag due to modest demand. We still expect fabricating stocks to outperform as building construction continues. We continue to expect engineering stocks to outperform. Infrastructure spending is rising. We still expect steel-related stocks to lag due to lower prices amid rising imports. We still expect tech to outperform as firms invest to cut costs. We now expect transportation stocks to match. The Canadian and American economies are growing fitfully.

We continue to expect traditional communications stocks to under-perform, except for those that serve online advertisers. We expect food, beverage and tobacco stocks to outperform as investors seek dividends, gains, and safety in consumer staples. We expect Canada’s drugstores and small healthcare stocks to under-perform, due to lower drug prices and generic competition. We expect surviving merchandisers to match as competitors fail.

We continue to expect gold stocks to outperform due to flat interest rates and the lower U.S. dollar. We now expect oil and gas stocks to outperform as production and investment decline while demand and prices revive. We now expect miners to match. China is investing in infrastructure to sustain its economic growth. We still expect forestry stocks to outperform. That’s particularly true for lumber producers that supply American construction companies.

The importance of diversification in investing

It’s best to diversify across the five main sectors of the economy: finance, utilities, consumer products and services, manufacturing and resources. Each of these broad sectors is made up of sub-sectors that often have different outlooks.

Remember, though, there’s danger in loading up on stocks in sectors expected to beat the market. That’s because investors often bid up the prices of such stocks, making them vulnerable in market setbacks.

Stocks in sectors that we expect to under-perform, by contrast, often trade at bargain levels. Besides, predictions—including ours—are susceptible to errors. So make sure you own some stocks even in sectors expected to lag the market.

 

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846