Scotiabank Cuts Suggested Stock Weighting, Citing Slow Economic Recovery

Bank of Nova Scotia reduced its recommendation for the weighting of equities in investors’ portfolios today, citing a sluggish U.S. recovery, European debt concerns and Chinese efforts to restrain inflation.

Investors should put 58 percent of their holdings in stocks, Vincent Delisle, Scotiabank’s director of portfolio strategy, said in a report today. Delisle had recommended an equity weighting of 63 percent since April.

“Investor sentiment will remain vulnerable to myriad challenges, and a tactical approach should add value again in 2011,” the strategist wrote. “Spain and Portugal could be the Euro spoilers next year, and China’s tightening intentions also threaten to dampen fragile risk appetite.”

In January, Delisle’s team forecast the S&P/Toronto Stock Exchange Composite Index would rise to 12,750 and the Standard & Poor’s 500 to 1,225 in 2010. The Canadian index gained 13 percent this year through yesterday to 13,276.01 while the U.S. benchmark advanced 9.7 percent to 1,223.12.

Today, Delisle set a 12- to 18-month estimate of 1,325 for the S&P 500 and 14,000 for the S&P/TSX.

While the bank says it recommends an “overweight” position in equities, it is lessening the degree of that stance in light of investors’ reluctance to embrace risky assets, Delisle said.


“This is not your buy-and-hold type market,” he told a conference in Toronto today. “The flows are not coming back into equities. There’s still a lot of pessimism and skepticism out there.”

Investors haven’t seen “tangible signs” that the U.S. economic recovery is sustainable, Delisle said. While Canadian employment reached a record high last month, the U.S. has fewer people working than it did six years ago.

China’s policy of tightening interest-rate and banking regulations to keep prices down is a bigger short-term risk for equity investors, he said. Chinese consumer prices jumped 4.4 percent in October, the most in two years, the country reported last month.

“The U.S. will stimulate their economy at all costs,” Delisle said. “As long as China is worried about inflation, you’ll get more rate hikes, and the Chinese stock market will underperform.”

China Effect

Scotiabank reduced its weighting for materials stocks to “marketweight” from “overweight” earlier this year. Weaker Chinese equities may hold back commodity prices, Delisle said. China is the world’s largest consumer of industrial metals and second-biggest energy user behind the U.S.

The S&P 500 may outperform the S&P/TSX for the first time since 2003 next year, as six years of gains versus stocks in the U.S. and other developed markets have left Canadian equities relatively expensive, Delisle said.

S&P/TSX stocks now cost $18.14 per dollar of analysts’ average profit estimate for the next year, compared with $14.43 for the S&P 500 and $13.93 for the MSCI World Index.

“Canada is not expensive, but relative to the U.S. and the rest of the world, Canada is probably at the heaviest premium we’ve seen in many, many years,” he said.

The difference in price per dollar of estimated profit between the S&P/TSX and MSCI World Index widened to 32 percent on Oct. 29, the biggest gap in Bloomberg records dating to January 2006.

To contact the reporter on this story: Matt Walcoff in Toronto at

To contact the editor responsible for this story: Nick Baker at

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