The financial crisis is coming to an end, setting the stage for a sharp recovery in stock markets in the near future, two investment industry executives said on Thursday.

At a panel discussion held by the Alternative Investment Management Association Canada in Toronto, Adrian Hussey, vice-president of Northwater Capital Management Inc., compared the current crisis with similar historical experiences. Comparisons show that the worst of the current crisis has passed, he said.

“We’re in the latter stages,” he said. “We can see the potential for resolution very shortly.”

While the health of the banking system has not been fully restored, it is now functioning much more effectively than it was late last year, according to Barry Allan, founder and chief investment officer of Marret Asset Management Inc.

“The banking system is not fixed, but it’s not broken anymore,” he said. “It’s functioning.” Allan added that lower levels of lending are normal during a recession.

During past crises, the bottom of equity markets tends to coincide with a resolution to the crisis, indicating the potential for a strong market rebound in the months ahead, Hussey said.

“There is a record of pretty strong recoveries following banking crises,” he said.

But the panelists warned that an economic recovery would take much longer than a resolution to the crisis. The economy is currently experiencing a deflationary spiral, and still lacks the credit necessary to foster growth, according to Allan.

This continued economic turmoil could hamper a substantial market rebound, he added.

“It’s now about the economy and whether the economy is actually going to recover enough to justify a rally in equity markets,” Allan said. “When the economy does start to recover, the returns can be pretty significant.”

To cash in on a market rebound, Allan suggests investing in infrastructure-related industries, including cement, steel and engineering companies.

“All of the fiscal stimulus is focused on infrastructure,” he said, adding that even if the economy takes much longer to recover, infrastructure companies will perform quite well.

Allan also encourages investors to hold between 5% and 10% of their portfolio in gold. “No matter what happens out of this, I think gold probably has to do well.”

The oil sector also presents promising opportunities going forward, since the limited supply of the resource will eventually drive its price higher, Allan said.

Investors should be aware that the next economic cycle is likely to be much shorter than those of the past, Allan said. Following the recession, he expects a two-to-three year period of strong growth and attractive returns. But current quantitative easing efforts by the central banks could drive up inflation to levels as high as 6% in the years ahead, he said.

“Inevitably, we’re going to have rampant inflation,” said Allan.

A hike in interest rates to keep inflation under control will drive the economy into another recession, limiting the period of growth and high returns that typically follows a recession, he said.

“I think it could be very, very attractive for maybe two or three years,” he said. “But I don’t think it’s going to look anything like any of the previous cycles where we come out of recession and have six to eight years of good times.”

IE