What to do about common stocks and mutual funds now

Every month the Money Reporter, the newsletter for income-oriented investors, publishes its list of 25 recommended common stocks and 16 recommended mutual equity funds.

What to do about common stocks now

Common_StocksAfter generally underperforming world markets this year, Canadian stocks enjoyed a bit of a turnaround in September. The S&P/TSX Composite was up about 1.7 per cent through most of September, while the MSCI World Index was up about 1.5 per cent. Most of the Canadian market’s gain was due to energy stocks, which rose 7.0 per cent, as west Texas intermediate oil rose 8.2 per cent to settle at a recent price of US$51.91 a barrel.

We believe that the Canadian market has more upside potential, but much will depend on what occurs in the US. There, the bull market will come to an end at some time. But with a generally positive economic and corporate backdrop, that time may be a while off.

As for stock selection, stronger economic growth and increasing interest rates have given growth-oriented stocks an edge. If you want to capitalize on this theme consider stocks like Scotiabank (TSX—BNS), which stands to benefit from higher interest rates, and Enbridge (TSX—ENB), which should do better if oil prices continue to rise.

What to do about mutual funds now

Global economic expansion and corporate profit growth have spurred healthy increases in stock market indices around the world this year. That means equities are not as cheap as they were earlier in the cycle. Corporate profits have certainly driven share prices higher over the course of the cycle. But increases in price-to-earnings ratios have also contributed significantly to the bull market.

In future it’s likely that earnings growth will have to be the main impetus behind increases in stock prices rather than rising price-earnings ratios. Prior to now, falling interest rates have made stocks more attractive to own, causing investors to bid up stock valuations. Now with rates seemingly on the rise, this tailwind could turn into a headwind. Earnings growth will, therefore, become more important.

Mawer Canadian Equity Fund seeks wealth-generating companies whose returns on capital exceed their cost of capital. These are the types of companies that may well excel in the current environment.

This is an edited version of an article that was originally published for subscribers in the October 6, 2017, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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