BAY STREET-Banks, property top bets if C$ is stronger longer

* Strong C$ seen keeping rates subdued

* Retail, consumer shares could benefit

* Manufacturing, forestry among biggest currency losers

* Money managers warn near-term C$ pullback possible

By Jeffrey Hodgson

TORONTO, Nov 1 (Reuters) - Buyers of Canadian banks, utilities, property firms and some retailers look set to become long-term winners if the country's currency -- as many predict -- resumes its recent rally to top the U.S. dollar in value.

But manufacturers, including auto parts makers, forestry companies, and other export-reliant industries, are expected to feel further pain as the soaring currency cools sales and slices into profit margins.

Strategists and money managers said the export sector's woes will force the Bank of Canada to keep interest-rate policy easy for a long time, ensuring a strong performance by the stocks most sensitive to rates.

"Deflation is more a risk than inflation, so rates are going to stay low. The dollar is putting tremendous pressure on the inflation rate," said Paul Gardner, portfolio manager at Avenue Investment Management, which manages about C$130 million ($120 million).

"People are going to go up the risk curve and buy dividends, companies that have stability to them, and that's banks and real estate."

The fund manager, who warns Canada could enter "a Japan situation" where a strong currency, aging population and overcapacity all drag on growth, also likes the prospects for utilities and dominant telecom players such as Rogers Communications Inc (RCIb.TO).

The Canadian dollar reached parity with the greenback for the first time in decades in 2007, powered by soaring commodity and energy prices. It has not traded there since July 2008, when the financial crisis spurred a safe-haven flight back into the U.S. dollar.

The loonie, nicknamed for the bird depicted on the one dollar coin, hit a four-year low in March then rallied 28 percent to a 2009 high of 97.97 U.S. cents on Oct. 15.

It retreated after aggressive warnings by the central bank that its flight threatens economic recovery. It closed at 92.43 U.S. cents on Friday.

BOOST FOR CONSUMERS

George Vasic, head of research at UBS Securities Canada, said it is only a matter of time before the currency returns to parity with the U.S. dollar, boosted by Canada's much stronger fiscal performance and ongoing commodity price support.

The equity strategist said that would increase the purchasing power of Canadian consumers and should support stocks geared to them.

"They can spend more, so what you're looking for is effectively the more domestically focused organizations, which would include a lot of names that are in the consumer staples, consumer discretionary sectors," he said.

"I would also include the banks in general. They do have U.S. operations. But they benefit from the fact that rates will be low."

Vasic said there is less currency correlation for resource stocks, a huge component of the Canadian stock markets. He noted that while many have U.S. dollar revenues and Canadian dollar costs, the Canadian currency is typically strongest when underlying commodity prices are rising.

He saw export-oriented industrial companies as the biggest potential losers, a widely shared view.

AGF Funds Inc Chief Investment Officer Martin Hubbes, who helps manage more than C$4 billion in Canadian equities, noted the fund house had largely shunned the auto parts sector partly because of concern about the rising currency.

"We, for a number of years now, have kind of avoided light manufacturing companies that have a very close ties to the U.S.," he said.

"Even though we've got some very good companies, I would say that (auto parts makers) Magna (MGa.TO) and Linamar (LNR.TO) are probably decent companies, it's just unfortunate that they find themselves in a tough situation."

NEAR-TERM PULLBACK DUE

But Hubbes, who also thinks a stronger currency will benefit retailers, said the Canadian dollar could be due for a near-term pullback even though long-term prospects are healthy, a view shared by several fund managers.

"We're actually a bit bearish on the Canadian dollar in the short to medium term. We actually believe the U.S. dollar is probably going to strengthen in the three to six months and think that's going to have a huge impact on the market," said Youssef Zohny, associate portfolio manager at Vancouver-based Van Arbor Asset Management Ltd.

He added the firm is bullish on the Canadian dollar and commodity and energy plays in the long term. But for now, it's lightening up on resource stocks, and moving more into underowned sectors like telecom firms and utilities.

($1=$1.08 Canadian) (Edited by Peter Galloway)