Canaccord Capital’s economist Michael Manford is bumping his equity allocation up to 70%, adding 5% from the fixed-income side of the portfolio. “The TSE 300 is, in a word cheap, and as cheap as it has ever been – period,” he says. “If you take the price to operating earnings ratio for the market as a whole, it is about seven percentage points under fair value. If you look at the ex-tech area, it is nine percentage points under fair value. That’s cheap.”

Based on current one-year bond yields and that growing pool of liquidity in Canada, Manford says the price to operating earnings ratio could easily be 32 versus its current 21. “Yes, we do expect 10-year rates to rise by at least 50 basis points over the next year, but we expect to have more than enough earnings growth to offset that and a lot more.” He suggests that the embedded earnings numbers is now about minus 17.9%, the lowest it has been since the data has been collected and far lower than in the 90-92 period.

The tech area is still expensive as a whole, he concedes. But, with the huge losses that have piled up over the last two years, there may be room for some staggering earnings growth in the tech area, he says. “Unfortunately that may have to await the spring. The cross-currents suggest to us that the TSE 300, with its vastly different composure, should be able to advance to the 8900 level by the end of next year, or almost 22% from levels posted at the time of writing.”

Manford suggests that the US economy had bottomed out, and was recovering, prior to Sept. 11. Since then, massive amounts of fiscal stimulus have been pumped into the US economy. “Yes, capital spending will be weak, but with all of the monetary and fiscal stimulus in the economy, the inventory cycle turning and consumers in such good shape, we do not see how you can prevent the U.S. economy from growing by an average of 4% between the spring and the end of 2002!”

“In our view, long-term rates could easily hit 6% by the spring and maybe 6.5%. Gee, thatÕll generate some ugly total returns. So, we suggest trimming exposure to the fixed income markets to 25% of portfolios and that at 5-year term at most. And for the equity markets? Hey, we donÕt have an indicator that is not in ground-pawing, snorting, bullish territory.”

Manford says with stocks going cheap, money available and earnings recovering, “the S&P 500 should not reprise its usual 37.2% average advance in the first year after the bottom. We think 1400 is in reach by the fall of 2002. And that is why we decided to take that 5% from bonds and to go to a 70% equity weighting. ItÕs just a classic time.”