By Andrew Willis
Like a Vegas odds-maker, Macquarie Group is pegging the probabilities on what the market will do this year, as the investment bank rolls out its top Canadian stock picks for 2010.
The big-picture call from the global dealer is for a Goldilocks year - a North American economy that’s not hot enough to push up interest rates, but not cold enough to generate a double-dip recession. Macquarie’s strategists peg the chances of that scenario playing out at 60%. With the odds favouring decent returns from stocks, Macquaire’s overriding thesis for the coming year is that investors should buy the dips.
However, Macquarie is obviously putting 40% odds on markets disappointing. Here’s what the investment bank sees potentially going wrong:
There’s a 15% chance that sovereign risk becomes a major problem, as governments buckle under newly assumed debt loads. If there are problems on this front, they are expected to start in Europe.
Macquarie also sees a 15% chance of markets rolling over when stimulus spending runs out, and a self-sustaining recovery still hasn’t kicked in. Finally, the dealer puts a 10% chance on U.S. consumers opting to continue their borrow-and-spend ways, and the Fed responding to this unexpected surge by jacking up rates, which would in turn knock back equities.
With that quick overview, drawn from Macquarie’s 83-page report on what the coming year may hold, here are the analysts’ favorite stocks:
Precious metals – While higher industry cost base provides long-term support, economic news is key for gold price in 2010. We look for a sluggish recovery to support bullion. Best ideas: Buy growth – we highlight Goldcorp (GG) and Eldorado (EGO).
Base metals – Our outlook for 2010 is more modest compared to the strong performances in 2009; we recommend a more selective and opportunistic approach, with a preference for copper exposure. Best ideas: First Quantum Minerals (FQVLF.PK) and Iberian Minerals (IZNFF.PK).
Uranium – Short-term weakness in the uranium price could present a good entry point. We remain bullish in the medium and long term given the nuclear build-out in China. Best idea: Uranium One (SXRZF.PK).
Oil and gas – We look for producers with established positions in resource plays to migrate to the top of the pack this year, particularly exposure to tight oil given premium relative price realization. Best idea: NAL Oil & Gas Trust.
Energy infrastructure – The combination of higher output prices and lower financing costs is taking up equity internal rates of return on renewable power to record levels. Best ideas: TransAlta (TAC), Enbridge (ENB), Northland (NPIFF.PK) and Algonquin (AGQNF.PK).
Infrastructure services – The companies in our Canadian construction and engineering coverage universe are poised to benefit from a range of opportunities. Best ideas: Churchill Corp. (CRHLA.PK) and IESI-BFC Inc (BIN).
Agriculture – There are several beneficiaries of higher long-term crop prices: agribusiness input service providers, equipment dealers, and specialty crop processors and grain traders. Best ideas: Ag Growth International and Alliance Grain Traders.
Consumer products and retail – Retailers that will thrive in this economic environment are situated at polar opposite ends of the spectrum – those selling at the low end and those selling at the high end. Best idea: Dollarama.
Telecom and technology – We see the communication sector as increasingly yield-driven as it matures, while technology should be a stock picker's market in 2010. Best idea: Rogers Communications (RCI).
Banks – Valuation has normalized and revenue growth is slowing. Given the regulatory capital uncertainty and elevated level of loan losses, we are neutral on the banks to begin 2010. Best ideas: Royal Bank (RY) and Laurentian Bank(LRCDF.PK).
Property – Buy REITs that are positioned to grow through acquisitions and have reasonable operating fundamentals. We also suggest mispriced REITs even if acquisition-driven growth is not in the cards. Best ideas: Boardwalk (BOWFF.PK) for value; Allied Properties for growth.