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One sure bet for the TSX -- volatility is here to stay

After an up and down spring on the exchange, KEITH DAMSELL reports, it's one outlook that most money managers appear to support

Now what?

It's been a wild spring for the Toronto Stock Exchange. On April 19, the S&P/TSX composite index hit a record 12,487 points, up a princely 10.7 per cent in less than four months. Many saw the bulk of those gains wiped out in May as a commodity correction shaved more than 1,000 points off the index. The sky did not fall, however, and the exchange quickly bounced back more than 300 points last week.

Don't panic is the advice from a host of money managers. The good news is that the fundamentals that drove the index past 12,000 points remain in place. The bad news? Volatility is here to stay.

The dynamic forces driving equity markets on a global scale are steadfast, said Paul Harris, principal and portfolio manager, Avenue Investment Management Inc. The Toronto firm manages about $60-million on behalf of retail and institutional clients.

Avenue is an energy and commodity bull and a double-digit retreat is not unusual in the context of a long-term run, he said. The TSX will remain choppy and may lose another 5 per cent in value over the coming weeks and months, he said.

The firm is buying up oil and gas favourites that have lost ground in recent weeks. Holdings include Suncor Energy Inc. and EnCana Corp. The firm's cash position has fallen to about 16 per cent of assets under management, down from about 20 per cent a few months ago.

Irwin Michael, president, I.A. Michael Investment Counsel Ltd., agrees that the commodities have likely not seen the end of the recent bull run.

"The market was very hot several weeks ago. You had to be in commodities, you had to be in oil and gas, you had to be in the market. Period," Mr. Michael said. "This is the flip side. We talk of fear and greed . . . this is the fear stage."

There is no evidence the long-term commodity bull cycle has played itself out, he said, noting that oil, gold and base metals prices are holding their ground. The Toronto money manager of about $1.3-billion is in a buying mood, selectively purchasing shares in energy firms and mining producers.

The long-term drivers of the resource boom -- Asian demand and limited supply -- remain firmly in place, said Fred Sturm, chief investment strategist, Mackenzie Financial Corp.

Nevertheless, the Toronto fund company has a neutral view on equities and expects volatility to continue through 2006 as central bankers address inflation and attempt to slow economic growth. The cash position of Mr. Sturm's $470-million Mackenzie Growth Fund has been growing and now sits near 20 per cent of assets under management.

Equity markets in 2007 and 2008, however, may be "quite good" as consumer products, health care, technology, utilities and other sectors catch up with the gains posted by the materials and energy sectors, he said.

But Toronto money manager William Ashby, president, Beutel Goodman & Co. Ltd., is in a more defensive mood.

Interest rates are rising and Mr. Ashby fears an inverted yield curve may be in the works -- a scenario that would see short-term bond yields outpace the returns of long-term bonds, resulting in a potential economic slowdown and market retreat. TSX valuations are "frothy to say the least," Mr. Ashby said. The manager of about $14.3-billion has a 10-per-cent cash position and a single Canadian stock on his current "buy" list.

"We're probably at the tail end of the cycle," he said. "The bottom line is there is an awful lot of uncertainty out there."

Peaks and valleys will be "sharp and fast," said Shauna Sexsmith, vice-president and senior portfolio manager for Canadian equities, Manulife Financial Corp., as a growing number of speculators and hedge funds do their best to profit from the commodity bull market. Long-term supply and demand issues driving commodity prices are unchanged, but she expects market volatility to continue through the summer and fall. Forecast risks include a "sea change" in interest rates or a slowdown in global growth.

"I have been hanging in and I would suggest to people that have some tolerance for risk to buy the dips," Ms. Sexsmith said.

Daniel Chornous, chief investment officer, RBC Asset Management Inc., is convinced that May's market tremors are symptomatic of a long-term bull market. He believes central bankers are on the right track and that interest rate hikes will slowly cool the economy and the equity market.

While commodity-rich Canada is well-positioned to take advantage of global growth, it's nevertheless prudent for investors to diversify and take some money off the table, Mr. Chornous said. The U.S. is a current favourite with many large-cap stocks now trading at a substantial discount to their historic valuations, he said.

© 2007 The Globe and Mail. All rights reserved.

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