Canada Strategists See Investment Angle As Fleets Age

Strategists at two of Canada's top independent wealth managers say the time may be right to invest in companies that make cars, consumer durables, and even industrial equipment like rail cars, as aging fleets and inventories spur a replacement cycle. After a long consumer and corporate pullback, spending has begun to bloom again on big-ticket purchases.

"The delay in purchasing new vehicles ... is going to start paying dividends over the next three or four years. You could see peak earnings for these companies in the next three or four years and as a result you should probably be buying them now," said Douglas Rowat, Vice President of Research and Strategy at Raymond James in Toronto.

Buying into industrial or consumer discretionary sectors can be risky since both are both highly sensitive to the economy, Rowat says, but significant replacement pressures mean many consumers and companies have painted themselves into a corner and simply have to renew key durables that they allowed to age during the recent recession. "Whenever you get a consumer item or product that is bumping against its useful life, you can anticipate three to four years of strong sales growth and demand for new product," Rowat said. "I think the growth in the economy will just be an accelerant to the growth that is already going to play out."

It's a strategy his counterpart at Macquarie Capital Markets is also eyeing. David Doyle, the firm's North American Economist and Canadian Strategist, said the U.S. consumer is starting to regain confidence, while Canadian corporations are showing a renewed willingness to spend. "There are a few signs the consumer is starting to come back," he said. "One of the main ways that will manifest is through increased auto purchases. The aggregate fleet of autos in the U.S. is at a relatively high age at this point - so the replacement cycle is likely to come to the forefront."

With the average U.S. automobile approaching eleven years old - having increased for ten years in a row - vehicles are either over or near the upper end of their useful life, Rowat said. That bodes well for growth at automakers and parts producers.

Macquarie's Doyle sees a few timing issues in the months ahead, as a fiscal tightening by the U.S. government likely constrains spending in the first half of 2013. The probable end of a payroll tax cut and a corporate depreciation write-off may depress appetites early in the year, but confidence will return in the second half, rewarding investors who bought in.

"I think you get that slowdown in consumer spending in the first half of 2013, but I don't think it's enough to push the U.S. into recession," Doyle said. "If you start to see weakness during the time period it could actually be a good buying opportunity for an investor if you wanted to play a rebound in the replacement cycle in the second half of 2013."

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