By James Langton
(September 1 – 17:25 ET) – As the Canadian economy shifts from resources to technology, stock market volatility is increasings,says a new report from Merrill Lynch. The bright side, though, is that economic volatility is shrinking.
The TSE’s increased tech weighting, “has caused a sharp rise in equity market volatility,” says Merrill, coming at the expense of basic materials stocks. But in Merrill’s “view, a move to a less volatile economy should increase earnings visibility and predictability, thereby supporting higher P/E multiples.”
In the meantime, though, Merrill expects more modest earnings growth in the third and fourth quarters and a further slowing in profits in 2001.
On a sector basis it notes that this past week “saw a flurry of consolidation activity in the broker/asset management industry on both sides of the border”. Merrill notes that prospects for ongoing M&A action has pushed a strong rally in these stocks, pushing Canadian firms ahead of its global rivals by nearly 15% so far this year. Nevertheless,”the sector continues to be undervalued on a global basis, trading at a 13% discount based on trailing P/E multiples.”
The Canadian bond market is another buying opportunity according to Merrill. The sector appears to be in a near-term bull market correction. “Upcoming liquidity dynamics also favour bonds, as the Canadian market will benefit from a $8.8 billion government
redemption in September.”