Canada’s laggard energy sector is set to outperform, according to strategists from Macquarie Group, who say it’s time for investors to buy energy and dump bank stocks to fund the purchase.

In a note to clients Monday, Macquarie’s Canadian market strategist David Doyle said he is upgrading the Canadian energy sector to overweight from a previous equal weight.

“There are green shoots for energy in Canada,” Doyle wrote. “These should help perceptions of the sector to improve in the months ahead.”

Doyle noted that feedback from the investment bank’s marketing suggests that fund managers in Canada are “uniformly underweight the sector.”

His optimism on the energy sector comes as the crude oil spot price in Canadian dollars has risen over 45 per cent since early September, while Western Canada Select prices have also jumped higher in recent weeks.

“Activity levels have also likely troughed. Support activities for mining and oil and gas extraction has picked up and small business confidence in natural resources has rebounded,” Doyle said. “Crude by rail (and energy export volumes) are poised to increase.”

Doyle added that Canada’s lack of competiveness and over-reliance on housing and consumer leverage will only increase the country’s reliance on energy for growth in the long-term.

“These headwinds should mean over time government policy will become more favourable,” he said. “It should also result in long-term Canadian dollar weakness and low interest rates, both of which should favour the energy sector.”

BANKS’ HEADWINDS

Meanwhile, headwinds facing Canadian banks should intensify due to the “tremendous run-up” in private sector leverage, Doyle said.

“Concerns with a potential hangover from this as interest rates rise, helps to explain why TSX relative performance has struggled,” he said.

Doyle recommends selling Canadian banks, where fund managers are generally overweight despite the growing headwinds, in order to buy energy shares.

“The energy sector has been underperforming the banks sector for nearly a decade, but in recent weeks this has reversed as a three and a half year trendline has been broken,”Doyle said.

The S&P/TSX Financials Index is down almost seven per cent this year, while the energy index on the benchmark has lost almost six per cent.