The Bank of Montreal’s chief investment officers are bullish on equities in Canada and the U.S., but they warn that the crisis in Greece threatens to jeopardize their performance.

“There is a pretty compelling case for equities, and I think there’s a pretty compelling case for Canadian equities,” said Paul Taylor, chief investment officer of BMO Harris Private Banking in Toronto, in a conference call on Thursday.

He said the firm is currently holding an overweight position on equities in its clients’ portfolios. But he noted that the premise for any stock market rally is a stable credit environment.

“We are very nervous to see people rioting in the streets of Greece,” Taylor added. “We’re hoping there’s a happy outcome to that. If not, all bets are off.”

Still, he expects the challenges presented by the European debt crisis to be manageable — at least in the medium term.

“Our assumption is that we will have — in spite of the current speed bumps that we’re experiencing right now — that we’ll have a stable credit environment, and that the current sovereign credit risk issues that we have, while meaningful, will ultimately prove to be manageable – at least as we get into the intermediate term,” Taylor said.

Canadian opportunities

In terms of equity market opportunities in the current environment, Taylor said he sees strong prospects for certain energy sector players, such as Bankers Petroleum Ltd. (TSX:BNK), and telecom industry players, including both Apple Inc. and Research in Motion Ltd. (TSX:RIM).

Taylor also expects automotive supplier Magna International Inc. (TSX:MG.A) to benefit from a rebounding auto sector.

U.S. investors getting back into the market

In the U.S., meanwhile, equity markets have been benefiting from investors gradually moving from the sidelines back into the market, according to Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

“That’s created some very strong support,” Ablin said in the conference call. “All in all, we’re still bullish.”

He expects cyclical sectors to perform particularly well in the months ahead, including financials, industrials, consumer discretionary and materials. Ablin also sees strong prospects for health care stocks in the U.S., which are currently trading at a 40% discount to their historical average due to the looming sector reforms.

Overall, Ablin said the market appears to have become a “rollercoaster” that is forcing investors to adjust their strategy.

“Buy and hold won’t really work that well; diversification doesn’t seem to be as effective as it once was,” Ablin said. “It requires investors to be, as we are, more nimble.”

Fixed income investors, meanwhile, are also in for a challenging ride in the months ahead with interest rates set to rise.

Taylor urged fixed income investors to keep a “relatively modest duration bias,” and to lean towards corporate bonds over government bonds. He also suggested considering alternative products such as preferred shares and yield funds.

IE