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Will the S&P/TSX Composite Index, down about 12% last year, surprise investors to the upside in 2019?

In an outlook report, GLC Asset Management says Canadian equities look more attractive than they did a year ago. However, with negative investor sentiment resulting in low flows, they require catalysts to unlock their value.

Within financials, that catalyst could be a bottoming-out or sideways-moving yield curve, which would remove the most bearish scenario among investors who see yield curve inversion as an imminent threat, says the report.

In energy, investor sentiment should turn as pipeline projects move forward. And in materials, a strong move for gold equities could shine a more positive light on Canadian equities overall, since precious metals represents about 6% of the composite index. That boost could result from “any downward movement in the U.S. dollar, decline in global bond yields, rise in geopolitical tensions, or combination thereof,” says the report.

The firm recommends a slight overweight to Canadian and U.S. equities, forecasting returns of 8% to 12% for North American markets. It also recommends investors be neutral non-North American developed market equities with an underweight in emerging markets.

The outlook’s general theme is moderation, recommending that investors take a neutral stance in their portfolios with a defensive bias.

While the current period of moderation means growth has peaked, “that does not immediately give way to economic or corporate earnings decline, rather just lower growth,” says the report. “Today’s debate is around how much global economies and corporate earnings will grow and, importantly, not how much will they shrink.”

For fixed income, the firm recommends a neutral weighting with a move toward higher credit quality. It forecasts a 1% to 2% total return in 2019 for the Canadian asset class, with an overweight in high-quality investment grade corporate and government bonds.