3 profitable ways to invest in the market in 2011

Not long ago, I was looking at my investment options for 2011 as I plan to contribute to my RRSP account early next year. GICs were the first to be removed from the list because of the dismal rates that were offered. With a 5 year GIC paying a meager 2.75% at best, Canadians who expect to reach their dream retirement will be moving past it as well. After all, the perfect retirement we are constantly bombarded with on TV by our financial institutions will just not be possible with such low rates of return.

In 2011, those who are brave enough to get back into the stock market after the beating they got in 2008 and those who decided to refocus on yield because they got sick of losing to inflation and getting punished for saving will certainly not be looking for the highest risks out there. They are risk averse, yet they are looking for something that pays more than a GIC or a High Savings Account; they are yield hungry. Where will the average person be injecting his money next year to get a decent yield without carrying excessive risk?

The interest rate variable

The decisive variable that will be directing the flow of money into the market in 2011 will be the interest rate, and for us Canadians, we will have to look to our southern neighbor for guidance. When it comes to forecasting, everyone stands on the same ground. Neither the number of titles you hold nor their length will give you any edge in this art since no one knows what’s coming next. Having said that, allow me to share my prediction for 2011.

Just last week, the bank of Canada left the benchmark interest rate at 1% citing increased threats to the global recovery. Between European sovereign debt issues, a stubborn unemployment in the US and slowing growth in key emerging markets, the central bank does not have much of a choice really. The risk remains on the downside; the Bank of Canada cannot afford to increase the gap between Canadian and US rates. The Canadian dollar is close to overtaking the US dollar. Further appreciation will certainly jeopardize whatever manufacturing jobs we have left and strain our exports further. Since QE2 has just launched, the US economy will take its time to stabilize in 2011 and return to growth mode slowly. The Federal Reserve will not be capable of raising rates any time soon in the US. Based on all of the above, I do not expect any significant interest rate hikes in 2011 by our central bank. If any, it will be small and well into 2011.

Canadian Stock Market: 3 Sectors that could benefit

You can still find decent yields out there if you look for high quality dividend paying stocks not to forget the potential for capital gains. Here are 3 sectors that I expect will be attracting money in 2011 by order of risk:

Low Risk

Canadian Banks: The Canadian banking sector survived the liquidity crunch in 2008, so chances are it will survive a volatile 2011 while the recovery is trying to gain traction. Investors can count on yields between 3.00% and 4.50%.

Medium Risk

Canadian REITS: Real Estate Investment Trusts have been a top performer in 2010. I believe there is still room for growth in 2011 as many of these REITs still have attractive yields reaching 8% in some cases. For those who prefer ETFs, the iShares S&P/TSX Capped REIT (TSE:XRE) currently yields 5.7%.

Above-average Risk

Energy Corporations: Oil prices have hit $90 a barrel recently. In 2011, analysts expect oil prices to remain strong backed by growing demand from the developing world. Many income trusts recently converted to corporations in the energy sector and kept generous monthly distributions. Take Crescent Point (TSE:CPG) for example, it is a heavy weight light oil focused Canadian producer which currently yields 6.4%.

Final Thoughts

I mentioned only 3 sectors above that could be attracting a lot of money as we transition into 2011. There are other sectors that stand to benefit as well such as Utilities and Pipelines. I chose to ignore precious metals as the level of risk is higher and because the sector is lacking in dividends. As for me, I will definitely be positioned into light oil in 2011 as I expect prices to remain strong well into the year unless we hit a second recession.