China could be the next big challenge for Canadian resources stocks

30 May 2010 | 03:23 Code : 20004 Geoscience events
Europe’s fiscal woes still dominate headlines, but the next big challenge for Canada’s...

Europe’s fiscal woes still dominate headlines, but the next big challenge for Canada’s resource heavy stock market may come from elsewhere, as Chinese efforts to tame inflation cool commodity prices and hurt the Canadian companies that produce them.China’s central bank said this month it would raise banks’ reserve requirement ratios for the third time this year to rein in inflation that hit an 18-month high in April.The underlying monthly price data did not show the overheating that some had feared, but the reserve requirement decision has implications for Chinese growth, and for the fate of Canadian firms that depend on a sizzling Chinese economy."China is a still a possibility as something that could hit us from left field," said Andrew Pyle, a wealth advisor at ScotiaMcLeod, in Peterborough, Ontario.Toronto’s resource issues are sometimes considered a "China play" because they feed China’s appetite for raw materials, and analysts said Canadian companies heavily into coal or copper -- including Teck Resources (TCKb.TO: Quote), Quadra Mining (QUA.TO: Quote), and First Quantum Minerals (FM.TO: Quote) -- could be hit the hardest."I would just be cautious on base metal stocks because most of those are tied to what’s happening in China," said Anil Tahiliani, a portfolio manager at McLean & Partners Wealth Management, in Calgary.Energy shares may also suffer if demand falls in China, one of world’s largest consumers of crude. Investors may be spooked if the price of oil falls below $70, a three month low which it neared last week. [O/R]These are new worries for a market that last week was again dominated by concerns about European debt.The euro hit an 18-month low versus the U.S. dollar and shares fell steeply on fear that budget cuts in some euro zone countries may stifle growth. [MKTS/GLOB]The Toronto Stock Exchange’s S&P/TSX composite index .GSPTSE rose 2.8 percent this week and is up 2.3 percent since the start of the year.Its materials group is up 6.7 percent this year so far, mainly on surging gold, while the energy group has fallen 5.2 percent.Canada’s economy is recovering and corporate earnings have been generally well-received, but analysts said investors may wish to lock up profits now, taking the old adage that says "sell in May and go away" to heart."This may be one of the years where that holds true simply based on the whole collection of factors. The fact that we’ve had this monster rally, we’ve had some shakes in the market. It’s kind of made a few people tense," said Pyle. If both Europe and then China push broader markets lower, analysts said there are still pockets of safety, including traditionally defensive stocks such as utilities."People are forgetting that utility companies like TransCanada (TRP.TO:Quote), Canadian Utilities (CU.TO: Quote), Fortis (FTS.TO: Quote), Enbridge (ENB.TO: Quote) are now growth companies," said Barry Schwartz, a portfolio manager at Baskin Financial Services."They have huge projects that they are working on and that’s going to improve earnings dramatically over the next three to five years. They are going to be a nice area of growth as well as dividend increases."He said telecom firms, which depend on domestic and not international demand to drive revenues, may also be good bets since a large chunk of their capital expenditures programs to build out networks have now been completed.There is always the possibility the market can climb further, but China will again be key. Steel-stomached investors may want to stick around through the volatility of the European debt crisis so long as China does not add to the mix."Europe plays a smaller part in Canada than Asia does," said Youssef Zohny, an associate portfolio manager at Van Arbor Asset Management in Vancouver, British Columbia."So what’s happening in Europe doesn’t necessarily affect and, if anything, we’ve become a little more of a safe haven with the European crisis." ($1=$1.03 Canadian) (Editing by Janet Guttsman and Jeffrey Hodgson)

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