* Canadian equity strategists tout replacement cycle
* Consumers need new cars, companies need new equipment
* Uncertainty means growth could be gradual, over 3-4 years
By Andrea Hopkins
Oct 16 Strategists at two of Canada's top
independent wealth managers say the time may be right to invest
in companies that make cars, consumer durables and even
industrial equipment like rail cars, as aging fleets and
inventories spur a replacement cycle.
After a long consumer and corporate pullback, spending has
begun to bloom again on big-ticket purchases, offering
investment opportunities for Canadians looking to pump up
portfolio growth with careful stock picks.
"The delay in purchasing new vehicles ... is going to start
paying dividends over the next three or four years. You could
see peak earnings for these companies in the next three or four
years and as a result you should probably be buying them now,"
said Douglas Rowat, vice-president of research and strategy at
Raymond James in Toronto.
Buying into industrial or consumer discretionary sectors can
be risky since both are both highly sensitive to the economy,
Rowat says, but significant replacement pressures mean many
consumers and companies have painted themselves into a corner
and simply have to renew key durables that they allowed to age
during the recent recession.
"Whenever you get a consumer item or product that is bumping
against its useful life, you can anticipate three to four years
of strong sales growth and demand for new product," Rowat said.
"I think the growth in the economy will just be an accelerant to
the growth that is already going to play out."
It's a strategy his counterpart at Macquarie Capital Markets
is also eyeing. David Doyle, the firm's North American economist
and Canadian strategist, said the U.S. consumer is starting to
regain confidence, while Canadian corporations are showing a
renewed willingness to spend.
"There are a few signs the consumer is starting to come
back," he said. "One of the main ways that will manifest is
through increased auto purchases. The aggregate fleet of autos
in the U.S. is at a relatively high age at this point - so the
replacement cycle is likely to come to the forefront."
With the average U.S. automobile approaching 11 years old -
having increased for 10 years in a row - vehicles are either
over or near the upper end of their useful life, Rowat said.
That bodes well for growth at automakers and parts
producers, and Rowat recommends buying stocks such as Canada's
Linamar Corp. His U.S. picks include Ford Motor Co
, Cummins Inc and Delphi Automotive.
Boats, while more discretionary than cars, are a $30 billion
global business dominated by the North American market,
according to Rowat. With an average boat age of 21 years in
2010, suppliers are anticipating replacement pressure. Retail
sales of new fiberglass boats in Florida and Texas are already
growing for the first time in many years, Rowat said.
His investment picks? Brunswick Corp and MarineMax
Inc - companies that have yet to regain even half the
value of their 2004 to 2006 heyday.
SLOW START TO 2013
Macquarie's Doyle sees a few timing issues in the months
ahead, as a fiscal tightening by the U.S. government likely
constrains spending in the first half of 2013. The probable end
of a payroll tax cut and a corporate depreciation write-off may
depress appetites early in the year, but confidence will return
in the second half, rewarding investors who bought in the
"I think you get that slowdown in consumer spending in the
first half of 2013, but I don't think it's enough to push the
U.S. into recession," Doyle said. "If you start to see weakness
during the time period it could actually be a good buying
opportunity for an investor if you wanted to play a rebound in
the replacement cycle in the second half of 2013."
Aside from the auto sector, Doyle said a rebound in consumer
spending would lift U.S. consumer discretionary stocks and
retailers like Macy's Inc.
Still, he is less confident about the Canadian consumer,
whose debt loads are reaching record highs and who will likely
be forced to deleverage just as the U.S. consumer is regaining
strength. The Canadian corporate sector is in better shape and
more likely to drive a replacement cycle on this side of the
border, he said.
"If you're going to be playing the replacement cycle, due to
the high consumer debt levels I'd steer clear of any stocks
leveraged to the consumer replacement cycle. It's more likely to
benefit from companies on the corporate side, industrial-type
companies," Doyle said. He believes Canadian infrastructure
development companies will benefit from investment
in commodity-rich provinces as growth stabilizes in emerging
On the industrial side, Rowat said the U.S. fleet of about
1.4 million rail cars is flirting with an average age of 25
years, and industry orders and deliveries have continued to ramp
up since early 2011. He looks to stocks like American Railcar
Industries Inc and Greenbrier Cos Inc to
"It's simply a fact that many of these companies don't have
an option anymore. They need to have new rail cars, or, for the
consumer, they are going to want a new boat or a new car."