Low interest rates and massive cost-cutting by U.S. businesses are setting the stage for North American stock markets to outperform bonds in 2003, says a report released today by BMO Nesbitt Burns Economics. Stocks are now cheap, while bonds are expensive.
“Stocks are a good value at today’s prices. Market participants remain cautious due to a possible attack on Iraq and lingering accounting worries. However, fundamentals are improving steadily,” said Dr. Sherry Cooper, chief economist, BMO Nesbitt Burns in the report focusing on factors that influence equity markets from an economic perspective.
“Bonds have been great investments. But with yields at the lowest levels in two generations, there is a material risk of a yield backup even though inflation is under control,” she said.
The report noted that profit expectations are ambitious, but achievable in the year ahead, driven by U.S. cost-cutting programs and the strong Canadian economy. “The low level of bond yields and the revival of the profit outlook are powerful tonics for the stock market,” said Cooper.
The report also highlighted that dividend-paying stocks are regaining favour. Dividend yields compare well with yields in both bond and money markets and they enjoy a degree of insulation from accounting-related worries.
Nesbitt’s top recommendations for investors are:
- Overweight Canadian assets.
- Reduce bond investments.
- Favour energy, gold and bank stocks.