TD Waterhouse today released its 2007 Investment Outlook offering insight into future market trends and their impact on investment portfolios. The Outlook predicts renewed strength in U.S. equity markets and diminished, but still respectable, returns in Canada.

“In the coming year, the main issue for global financial markets will be how the U.S. market fares,” says Bob Gorman, chief portfolio strategist, TD Waterhouse. “On that score, the news is good. While the U.S. economy is slowing and the housing market has already slumped, several positive factors outweigh the negatives. These include reasonable stock valuations, a more accommodative monetary policy, lower currency risk for Canadian investors, and the ‘Presidential Effect’ whereby years three and four of a President’s mandate have historically been much better for U.S. stock markets.”

Gorman predicts that the following six themes should dominate the markets in 2007:

The U.S. stock market will rise for the fifth year in a row, record its best year since 2003 and generate double digit returns. During the fall of 2006, the U.S. market has staged a brisk rally. While a pullback in the near term would not be surprising, the outlook is positive for the coming year. American short-term interest rates are expected to fall more than Canadian rates, providing greater impetus for U.S. equities.

U.S. equity markets in 2007 will feature the continuing rotation of leadership into the large cap stocks. Leadership among the large caps will broaden beyond the household goods producers cited last year to include major U.S. banks such as Citigroup and Bank of America, which exhibit dividend yields of about 4% and low price-to-earnings (P/E) multiples. Home improvement retailers such as Home Depot will benefit later in 2007, as will the technology sector.

The Canadian stock market will under-perform its American counterpart for the first time since 2001 but still generate creditable single-digit returns. The main reason for the pull-back will be the lack of impetus from the natural resources sector that the market enjoyed in recent years. Leadership will shift from the cyclical sectors to the less cyclical in 2007. Past favourites such as Manulife, Sun Life and Power Financial, along with the Royal Bank and Bank of Nova Scotia, should be solid performers in this environment.

Bond investors should once again earn their coupon, approximating 4%. Corporate issues will continue to generate slightly higher returns than government bonds.

2007 will represent a flashpoint for energy trusts. Some will become viewed as diminishing assets with impaired cash flow, sparking a wave of mergers, with stronger trusts taking out the weak.

Europe will represent the best major international market in 2007. With stock trading at 12 times estimated 2007 earnings and a dividend yield over 3%, Europe represents very good value at current levels. Japan remains on solid footing but it will not repeat its very strong performance in 2004 and 2005, during which time the Nikkei Index rose by about 50%.