BMO investors bet on stocks, keep eye on consumers

Wed Nov 4, 2009 1:32pm EST

* BMO investment team overweight in equities

* Says best bet is that recovery is sustainable

* Big risk is a new crisis of consumer confidence

By Andrea Hopkins

TORONTO, Nov 4 (Reuters) - Top investment strategists at Canada's fourth-largest bank said on Wednesday they are betting on gains in the stock market and believe the economic recovery is sustainable -- provided consumers don't have another crisis of confidence.

Paul Taylor, chief investment officer at Bank of Montreal's (BMO.TO) BMO Harris private banking division, said BMO's huge investment portfolio is overweight in equities and still adding to that position, believing that stocks will rise amid economic recovery.

In setting out four possible scenarios for the economy over the next 12 months, Taylor said the most likely outcome is that the recovery will be sustained. But the second-most likely scenario is that confidence will evaporate, and the economy will fall into a double-dip recession.

"We do believe that policy-makers have taken the right course of action; we believe that a sustainable economic recovery is the odds-on bet," Taylor told reporters during a conference call.

"But we need to be mindful of the potential that this fragile recovery that is based on this illusory emotion of confidence could in fact ... disappear overnight if we're not careful."

Looking over the next 12 months, Taylor said he believes the U.S. economy will grow by about 2.5 percent, while Canada might do a little better.

Taylor said equities remains the best place to invest, given the low returns in cash or bonds.

Still, Jack Ablin, chief investment officer at Harris Private Bank, BMO's U.S. unit, said momentum may soon shift.

"(Momentum) is one of the factors that has got us into the market in an overweight position. We will likely soon move to more of a neutral weighting in equities, but we still believe equities will be the prevailing asset class over the next four quarters," he said.

Ablin noted that stimulus spending by the U.S. government is providing a strong tail wind that should continue to propel growth in the fourth quarter of 2009 and into 2010. But he said that boost won't last forever.

"At some point, even a little less than a year from now, we're going to be taking this patient off life support, and as we remove the tubes and wires we really have to try to ascertain what's going on with the patient -- do they have a pulse?" Ablin said.

"Right now, if I look underneath the surface -- like job creation, net pay change year-over-year and small business surveys -- I'm finding there is very little activity beyond the fiscal stimulus that is going on."

U.S. government data released last week showed the U.S. economy grew in the third quarter for the first time in more than a year, signaling the end of the worst recession in 70 years. (Reporting by Andrea Hopkins; editing by Rob Wilson)

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