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BAY STREET-C$ firming trend favors banks, energy, consumer

By Jennifer Kwan TORONTO, March 21 (Reuters) - Canadian investors could reap big benefits as the Canadian dollar sprints toward parity with its U.S. equivalent if they put the right bets on shares of banks, resource and consumer-linked companies. The rise in the currency, known as the loonie for the picture of the loon on the one-dollar coin, is making international investors look more closely at opportunities in Canada. Those investors are most likely to buy commodity names on speculation of a global recovery, especially energy companies that lagged the recent rally, said Paul Taylor, chief investment officer at BMO Harris Investment Management Inc. "In anticipation of a stronger Canadian dollar, foreign investors are looking to the Canadian equity market, and when they look at the Canadian equity market they are primarily looking at the resources sectors," he said, citing Suncor Energy Inc as an example of a stock that is getting attention. "It's a good thing for our domestic equity market. For global asset allocations Canada is having its day in the sun," added Taylor, whose firm has about C$12.7 billion assets under management. Earnings for Canadian energy companies have rebounded moderately since recession lows as oil prices have strengthened. However, a rising Canadian dollar could squeeze profit margins, as the companies sell their output in U.S.

dollars. Financial issues, which make up about a third of the weighting of Canada's main stock market index, the S&P/TSX composite , could also see a rise as the higher Canadian dollar dulls inflation, he said. "If the Canadian dollar does continue to firm, or even holds where it is now, you can make the argument the Bank of Canada doesn't need to tighten (credit) because the FX is doing the heavy lifting," Taylor said. He added that banks in particular would benefit if short-term interest rates stay low for a longer period because low rates enable them to borrow cheaply and lend at higher rates. The Canadian dollar rose as high as 99.38 U.S. cents on Friday, its strongest level in nearly 20 months, as unexpectedly robust domestic inflation and retail sales data put more pressure on the inflation-conscious Bank of Canada to raise interest rates. The central bank has not said when it will raise rates, but markets expect it to meet a promise to keep rates low until at least the end of June, provided inflation is tame. The Canadian dollar reached parity with the greenback for the first time in decades in 2007 and fell back in July 2008, when investors flocked to the safe haven of the U.S. dollar during the worst financial crisis since the Great Depression. Brent Smith, chief investment officer at Franklin Templeton Managed Investment Solutions and co-lead manager of the fund giant's C$7 billion Quotential Program, said he likes Canada, along with Asia and Latin America, and the currency outlook is a key factor. "If you are positive on the outlook for investments in those regions not only will you get an appreciation in the underlying investment you'll also get that added kicker in the form of currency appreciation," he said. IMPACT ON CONSUMER, MANUFACTURERS Lower prices for imports and the resulting increased purchasing power for consumers could boost stocks in the consumer discretionary and staples groups, which house names such as Loblaw Companies Ltd. "Anybody that imports a lot of their products from the U.S. could get a boost," said Barry Schwartz, a portfolio manager at Baskin Financial Services, singling out Shoppers Drug Mart as a stock to watch. "The problem, of course, is you get worried about cross-border shopping.

It's a double edged sword." Sectors that could feel a pinch include manufacturers, forestry companies and other export-reliant industries, as a strong Canadian dollar erodes profit margins. "Goods that are produced here and that in particular are exported south of the border, those are folks that are going to have a more difficult time of it," said BMO's Taylor, citing the forest products sector and auto parts makers such as Magna International For more analysis, please see: ($1=$1.02 Canadian) (Additional reporting by Ka Yan Ng; editing by Janet Guttsman) Keywords: COLUMN CANADA MARKETS (jennifer.kwan@thomsonreuters.com; +1 416 941 8178; Reuters Messaging: jennifer.kwan.reuters.net@reuters.com) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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