The 4% drop in financials stocks on Monday may be the start of more bad days to come, as the current bear market run loses steam, says Dundee Securities analyst John Aiken.
But not all companies in the space are created equal, he adds, and wise investors may want turn their attention on Canada's large-cap asset managers, in an effort to navigate through a likely downward trend.
John Aiken, analyst at Dundee Securities, said:
"We freely admit that we are at risk of becoming perma-bears with our outlook for the financial services players but it does appear that the pendulum may be swinging back towards negative sentiment."
"We continue to advise caution, as the full impact of the global economic slowdown has not yet been seen on earnings."
Among the various segments that make up the financials group, Mr. Aiken prefers the asset managers best, including neutral-rated CI Financial (OTCPK:CIFAF), IGM Financial (OTCPK:IGIFF) and AGF Management. Despite declining assets under management, he says these companies still have strong cash flow and should continue to make profits and sustain their dividend payouts.
The analyst thinks selective investment dealers will have a stand-out year, but remains cautious on the space because "valuations have run ahead of themselves." He likes GMP Capital (OTC:GMCPF), rated "neutral", over Canaccord Adams, rated "sell."
"We continue to believe that the credit pressures the banks face will weigh on earnings and, subsequently, valuations. After their strong run, investors should now view the banks as sources of funds for investments in other sectors with a higher probability of generating positive earnings growth."