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Anticipating low double-digit returns from U.S. market

Veteran money manager Rohit Sehgal, known for his Canadian growth stock picks, expects resurgent technology and financial shares to push the U.S. market to double-digit gains this year, outperforming the Canadian equity market.

"The easy money has been made," said Mr. Sehgal, vice-president of Goodman & Co. Investment Counsel Ltd. and chief investment strategist for Dynamic Funds, referring to the markets' strong comeback after the financial crisis. "I see a single-digit return for the Canadian market, and a low double-digit in the U.S. market."

The big headwind for markets is the U.S. Federal Reserve Board's plan to end the second round of quantitative easing in June, said Mr. Sehgal, a commodities bull who oversees more than $6-billion in assets.

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"But I don't think it will become restrictive, or take the stimulus off for another six months," he said. "The central bank will make sure it doesn't do anything to come in the way of an economic recovery."

U.S. banks may not have the earning power they had in the past because of their new capital structures, but they could still go up 50 per cent or more from current levels, Mr. Sehgal said.

"We like some U.S. banks like JPMorgan and Bank of America ," he said. "We own some industrial names like Joy Manufacturing . In technology, we like Apple . We own logistics companies like United Parcel Service Inc., and more recently we have been buying EMC, a data storage provider."

While Mr. Sehgal was light on Canadian banks from 2003 to 2008, the Big Five now make up nearly 30 per cent of his mutual fund.

"We are getting even more bullish on banks," he said. "You are getting the best of both worlds, with a very attractive yield and high return on equity in the high teens." His favourites are Toronto-Dominion Bank , Royal Bank of Canada and Bank of Nova Scotia , which recently acquired his firm's parent, DundeeWealth Inc.

Mr. Sehgal, who joined Goodman & Co. in 1998 after a 27-year stint with London Life Insurance Co., runs mainly Canadian stock funds. His flagship Dynamic Power Canadian Growth mutual fund, which owns some foreign stocks, earned an annualized 9.3-per-cent return for the 10 years ending Feb. 28, compared with 8.2 per cent for the S&P/TSX Total Return Index. His younger $757-million Dynamic Power Hedge fund made an annualized 17.6-per-cent gain over five years, versus 6.7 per cent for the same index.

"Rohit has a good record over time, but it has not been for the faint of heart because there have been some pretty wild swings in his funds," said Dan Hallett of HighView Financial Group.

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"His theme of being pretty bullish on commodities hasn't changed all that much. He has been right for the most part. … In early 2007, his mutual fund held 80 per cent in commodity stocks. That gradually fell to 50 per cent last year."

Top Metals, Energy Picks

Mr. Sehgal says he remains a fan of resources. Energy stocks make up 30 per cent of his mutual fund and 60 per cent of his hedge fund. He likes companies involved in the Canadian oil sands, such as Athabasca Oil Sands Corp., Canadian Natural Resources Ltd. and Suncor Energy Inc. "A lot of new projects are coming up," he said. "We are going to see production grow at a very fast pace."

With political tensions in Libya and the Middle East raising concerns about oil supply, he expects analysts to raise their oil price forecasts, which will translate into "positive surprises" for energy companies. Crude oil futures closed at about $108 (U.S.) per barrel last Friday in New York. "I think the new range for the oil price is about $90 to $100 a barrel," he said.

Mr. Sehgal prefers metals that benefit from economic growth over precious metals, but has become cautious about copper in the shorter term due to concerns over China's economic growth. "Given what has happened in Japan [in its rebuilding after the earthquake] we think some of the bulk commodities like coal, steel and iron ore still look very good. And we are very bullish on the agricultural commodities, like potash."

Still, he holds some gold stocks. His favourite is Osisko Mining Corp. "They have gone through their exploration stage, and they are now soon going to be producing at a rate of 650,000 ounces per annum," he said. "Even if the gold price goes down to $1,000 per ounce, they will do very well. But I think that the gold price will stay around $1,400."

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Before Japan's nuclear crisis, Mr. Sehgal had been bullish on uranium. But he recently sold Cameco Corp., Paladin Energy Ltd. and some uranium juniors. "We do not own any uranium stocks now," he said. "We decided it was not prudent to have an exposure there until the dust has settled."

It's not surprising that Mr. Sehgal is playing it safe. While Dynamic Power Hedge lost 72 per cent in the 2008 crisis, it has since climbed back to its high water mark.

"It was not because we had bad stocks," he said. "It was just an environment where everything got trashed. Like everybody else, I was scared but I have been in the business long enough and always believed that fundamentals always do prevail."

Rohit Sehgal's stock picks from his Dynamic Power Hedge Fund

Athabasca Oil Sands Corp.

The oil sands player, which owns over 1.5 million acres of leases and permits in the Athabasca region of Alberta, has an estimated recoverable resource of 8.8 billion barrels. PetroChina last year acquired a 60-per-cent stake in its Mackay and Dover oil sands projects. The first commercial project begins in 2014 with expected production of 500,000 to 800,000 barrels per day for about 40 years, Mr. Sehgal said. His one-year target is more than $20 a share, and $25 in a takeover scenario.

Aurora Oil & Gas Ltd.

The Australian-based oil and gas company is developing an area in the Eagle Ford shale play in Texas. About $7-billion has been invested by various players to acquire land there since last summer. Aurora could quadruple its reserves in the next two to three years from the current 112 million barrels, Mr. Sehgal said. "In the near future, we are looking at 5,000 barrels a day," he said. His 12-month target is about $4.50 a share.

Pacific Rubiales Energy Corp.

The Canadian-based oil and gas producer operates mainly in Colombia. Its strong management team grew oil production to 220,000 barrels a day last year from 25,000 in 2007, and there are plans to increase output to 500,000 barrels, Mr. Sehgal said. It generates more than $1.4-billion in cash flow for exploration and additional production growth. Weakness in the stock is temporary as the company is showing higher growth potential by acquiring more on-shore oil blocks, he said. His 12-month target on the stock is $35 a share.

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