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Markets face a rough ride: fund manager

Bissett's Fred Pynn advises a focus on the opportunity to bargain hunt

TORONTO -- Investors banking on a big rebound later this year in the Toronto market are likely to be disappointed, according to Fred Pynn.

The Calgary-based fund manager, who was in Toronto to speak at the annual Franklin Templeton Investments outlook and opportunities forum, expects the S&P/TSX composite index will finish the year not far from where it currently stands. His year-end target is 12,000, up from its current level of 11,758.91.

But it isn't likely to be smooth sailing between now and then, Mr. Pynn, who is co-lead manager of the $3.5-billion Bissett Canadian Equity Fund, warned in an interview.

"I think we are set up to have a volatile summer with a negative bias," he said. Moreover, "we are moving into what has historically been the weakest season" of the year for the Canadian market, namely August, September and October, said the president and chief investment officer of Bissett Investment Management. In addition, "we have got geopolitical tensions," he said. And "it appears that U.S. interest rate hikes are finally starting to bite." As well, "we have also seen some pretty spectacular earnings disappointments in the U.S."

His advice to investors: Focus on the opportunity to bargain hunt in this traditionally weak seasonal period, which he noted, sets the stage for what are traditionally the three strongest months for the market -- November, December and January.

Other advice: Evaluate your portfolios as it might be a good time to take some profits, particularly in higher beta sectors such as mining and reinvest the proceeds in some higher-quality and less cyclical sectors such as financials and consumer issues.

"The easy money has been made in mining; the easy money has been made in energy," he said. In the consumer sector, Mr. Pynn specifically mentioned fund holding Shoppers Drug Mart Corp., "a great business" but the stock has gotten "pricey."

Another stock he referred to was Canadian National Railway Co., one of the fund's largest holdings. CN has been selling off probably on concerns about the strength of the U.S. economy. "Given how much CN has gone down, we would be seriously considering going back in and buying more."

Don Reed, president and chief executive officer of Franklin Templeton Investments Corp. and lead manager of the Templeton International Stock Fund, suggested Canadian investors take some of the profits made in the hitherto booming Canadian market and put them to work in markets elsewhere.

"We are seeing some good opportunities outside of Canada, in places like Europe, Asia and the emerging markets," he said. The Templeton International Stock Fund invests outside of North America.

His biggest exposure in that $2.2-billion fund is Britain, which he notes is the second largest market behind the United States. He is very much underweight the Japanese market. "The stocks are a bit more expensive there." However, despite that, his fund is overweight Asia generally.

Mark Mobius, who oversees emerging market investments for Templeton, says good value is surfacing in emerging markets after the rout in equities in developing countries around the world.

On average, emerging markets plunged about 22 per cent after hitting a record high in early May.

Mr. Mobius points out that a drop of that magnitude would normally be considered a bear market.

"It was a very sudden decline."

The manager of the $515.4-million Templeton Emerging Markets fund believes emerging markets can resume their upward climb when worries about the U.S. economy subside.

If the U.S. Federal Reserve Board signals that its interest rate hikes have ended and the U.S. economy continues to expand as Mr. Mobius expects, emerging markets should do quite well, he says.

"That goes for the rest of the world, too."

Mr. Mobius acknowledges that risks are looming in the U.S. economy: The Fed could overshoot on interest rates, the housing market could collapse, and the U.S. government could plow too much into military spending.

But for now Mr. Mobius is optimistic the Fed will hold the line on rate hikes before the U.S. economy slides into recession.

For the near term, the portfolio manager expects the turbulence in emerging markets equities to continue, but he is happy to be finding bargains.

He points to banking and consumer stocks in Turkey, for example, along with banks and technology companies in Taiwan.

Political uncertainty in Brazil is creating attractive valuations in that country as well.

"Brazil is one of the cheaper markets in the world today."

© 2007 The Globe and Mail. All rights reserved.

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