National Bank Financial is sticking to its market call favouring foreign equities over domestic ones in the year ahead.

“Canadian equities hit a rough patch in the first two weeks of February before resuming their uptrend. Whether the rally still has legs will depend on earnings growth and, of course, the movement of commodity prices,” it notes.

“We are still comfortable recommending a neutral position in U.S. equities and are maintaining our conservative 12-month target of 1,250 for the S&P 500,” it says. “For Canadian equities we continue to recommend an underweighted position since profits are likely to decline in 2006. We reiterate our 12-month target of 10,500.”

Looking at the market by sector, NBF stresses that it is still very comfortable with its defensive stance. “We remain cautious on financials since we think the 12% earnings growth expected by the consensus will be difficult to achieve as the yield curve flattens and with loan loss provisions likely to increase,” it explains. “We also reiterate our underweighted position in energy, since oil demand growth is decelerating and Canadian oil sands face upward cost pressures.”

“We continue to think that foreign stocks will outperform North American ones. Our preference goes to Asian markets, the Japanese in particular,” NBF adds. “Analyst forecasts suggest that its earnings, and therefore stock prices, will continue to outperform those of European indexes in 2006.”