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It's downhill for the TSX, manager says

Christine Décarie believes index likely has hit high for year


The Canadian stock market has probably already seen its high for the year, according to fund manager Christine Décarie.

Ms. Décarie has been running the Investors Mutual of Canada Fund since January, 2000. The $2.4-billion balanced fund has gained 5.81 per cent so far this year. It had a return of 15.97 per cent in the 12 months to Sept. 30, 11.55 per cent a year on average over the past three years and 8.66 per cent over the past 20 years.

"I think we will probably finish the year at a lower level than we were at the end of the third quarter," said the Montreal-based manager with Investors Group Inc. The S&P/TSX composite index hit a 52-week high of 11,118 points on Sept. 28 but has lost considerable ground since then, closing yesterday at 10,360.79.

The energy sector has been a prime factor in that decline, given its index weighting. But "I think there is more downside," Ms. Décarie said. Also, there have been some profit disappointments, not so much because the results were poor but more because expectations have gotten ahead of earnings, she suggested. However, she doesn't expect such disappointments to be widespread in the third quarter.

Ms. Décarie currently is drawn to the industrial sector, primarily in the United States, where there are proportionately more companies that fare best in the later phases of the economic cycle. In Canada, there are very few later-cycle businesses and the few that exist tend to be concentrated on the transportation side. "We are getting to the 80-per-cent [capacity utilization] level, which historically is the level at which we start to see capital expenditure pick up," she said, in explaining the attraction of that sector.

Ms. Décarie said United Technologies Corp. (UTX-NYSE) has exposure to late-cycle businesses such as commercial aerospace and non-residential construction. United Technologies operates through divisions such as Pratt & Whitney aircraft engines, Otis elevators and Carrier heating and air conditioning. She said the management has a history of making smart accretive acquisitions. She expects that Hartford, Conn.-based United Technologies will generate share profit growth of 15 per cent a year over the next two years. The shares, which closed yesterday at $51.60 (U.S.), are trading at a 5- to 10-per-cent discount to their peer group, she said.

Canadian National Railway Co. (CNR-TSX) caught her eye for a number of reasons including the fact that demand in the rail industry exceeds capacity. Besides, CN "is the best-operated rail company in North America" and its operating margins are 15 per cent above the industry average, Ms. Décarie said. The Montreal-based company is generating a high level of cash flow and returning it to shareholders via share repurchases and dividends. Rising oil prices aren't the problem for CN that they are for other transport firms as CN has partly hedged its position and also has a surcharge mechanism in place, she added. CN shares ended yesterday's session at $82.70 (Canadian).

CanWest Global Communications Corp. (CGS.SV-TSX) shares are compelling from a valuation point of view, she said. If the value of the Australian and New Zealand assets and the newspaper assets is excluded, the valuation on the remaining portion of the company is very low, she said. She also noted that ratings are rising in the Canadian TV operations but that will not work its way into profit for at least a year. Plans by Australia to deregulate and change foreign and cross ownership rules for television networks will also help the stock, she suggested. News on the latter will probably be released by year-end or early next year. She also said clarification of the rules governing income trusts in Canada should be positive for CanWest MediaWorks Income Fund, which holds most of the company's newspaper assets. CanWest Global closed yesterday at $11.11.


Fund manager Christine Décarie may believe the broader Canadian equity market has already seen its peak for the year, but that doesn't mean there aren't still gains to be made in both Canada and the United States.

Investors Mutual of Canada - C

CATEGORY:Canadian balanced

MANAGER:I.G. Investment Management

LOAD STATUS:Open-ended

TOTAL ASSETS:$2.4-billion



Returns to Sept. 30, 2005

1-year simple rate of return:15.97%

3-year compound annual:11.55%

5-year compound annual:3.45%

10-year compound annual:8.30%

15-year compound annual:9.35%

20-year compound annual:8.66%

Top 10 holdings, As of Aug. 31, 2005

1-Royal Bank of Canada

2-Suncor Energy

3-Gov't of Canada 4.5% Sept./01/07

4-Toronto-Dominion Bank

5-Gov't of Canada 5.75%, June/01/29

6-Bank of Nova Scotia

7-Sun Life Financial


9-Talisman Energy

10-Manulife Financial


© 2007 The Globe and Mail. All rights reserved.

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