It’s the time of year when investment experts get busy writing commentaries and fashioning forecasts. With one eye on the road ahead, and the other looking in the rear view mirror, here’s their vision of Canadian equities for 2011.

Investment managers are optimistic in their outlook for equities in the coming year. Their expectation for stronger returns, though, is tempered with a cold touch of caution.

“Any view of the future is rooted in the past,” says Tim Caulfield, vice-president and director of equity research with Bissett Investment Management. “The past few years have been an extremely volatile environment; (but) since March 2009 we’ve seen a very significant rebound in the equity market.”

From peak to trough, the equity market lost about half its value. And now given the recovery, the equity markets are within shooting distance of their pre-recession peak.

Caulfield concedes most businesses today are more or less fully valued, but remains optimistic about a more normal type of return trajectory. “While a lot of excess return potential has been removed from the market given the significant rebound, we still expect what we consider to be satisfactory returns for the market going forward.”

Considering the correlation between the Canadian and U.S. markets, some experts are looking beyond our national boundaries to predict the future of equities within them. Britt Doherty, senior portfolio manager with Scotia Asset Management, has his eyes trained on the current trends in the U.S.

“If the Fed is trying to stimulate economic growth (in the U.S.) by keeping rates low, and do so successfully, then the bond market is going to be an ugly place at some point next year,” he says. “There could be a flow out of bonds into equities at some stage, if that trend gets going.”

Not surprisingly Doherty is overweight in economic sectors rather than rate-sensitive issues. “I’m overweight energy, material, industrials and technology, and underweight utilities, telecom and healthcare which are more interest rate sensitive sectors,” he says.

Caterina Prato, vice-president and portfolio manager with AGF Investments, says rising interest rates in the coming year could trigger a shift from bonds to equities.

“If [government spending] continues to occur [in 2011] it would be natural to see rates increase,” says Prato. “Which would suggest that equities would be favourable over bonds; from that perspective we’re looking at opportunities for funds to take advantage of that.”

A further reflection of the confident-but-cautious theme is evident in the recent Russell Investment Manager Outlook, according to which 77% of investment managers are bullish on Canadian stocks.

“Although Canada is not immune to economic challenges—especially if the U.S. recovery continues to lag—our nation’s strong resource base is clearly a valuable asset as the global economy picks up steam,” says Sadiq S. Adatia, chief investment officer with Russell Investments Canada.

All things considered, there does appear to be a sense that Canadian equity markets have weathered the roughest storm in their cyclical journey. The way things stand at the moment, the equity market is poised for a good uptick. One must proceed with caution, though.

Adatia warns there may be some blips lurking around the corner.

“The Greek debt crisis has faded from headlines, and investment managers may be feeling that no news is good news,” he says. “However, we don’t believe the full dimensions of that crisis have yet been uncovered, and expect that European markets may experience further setbacks, such as the recent negative news on Irish banks.”

Events like the European crisis are only made worse by the currency fluctuations they cause. Together they can create volatility and uncertainty as to whether or not to invest, says Prato.

Caulfield, who bases his optimism on the long-term, normalized return potential of the market, couldn’t agree more. “There are always dangers, and there are always events that could take place. Over the past decade or so we’ve witnessed so many of them,” he says. “Whether it’s in the U.S. or in Europe there are still structural issues there that need to be dealt with; and those issues will take quite some time to fix.”

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Ken A. Miller:

Over the past 6 weeks the stock market has reached bullish sentiment numbers associated with previous important highs. One, the Trin, has the most exceptional reading since the 1960s. Valuations as measured by Case Schiller are also unattractive.

Friday, January 14 at 2:14 pm | Reply

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