Equities will not continue to rally at the rapid pace of the last six months, but will advance modestly as an economic recovery gets underway, investment industry executives said on Wednesday.

Pierre Ouimet, chief strategist at UBS Global Asset Management, and Christian Broda, director and head of international research at Barclays Capital Management, spoke at the Investment Counsel Association of Canada’s annual conference in Toronto.

The panelists agreed that although the degree of recent growth in stock prices is unlikely to continue, equities show prospects for continued growth.

“There is still some upside on equities,” said Ouimet, “and there’s ample liquidity, obviously, to feed into that.”

He said he is maintaining overweight exposure to equities in the current environment.

Ouimet said markets will be looking for sustainability in earnings, and more revenue growth, since much of the recent improvements in corporate earnings have been driven by cost cutting efforts.

“A strong rebound in corporate profits and ongoing productivity will help to support equity prices,” he said. “If you’re looking at the trend growth in equity returns, it won’t be anything like we saw in the last six months, obviously, so the shape of the progress is going to be more mundane.”

Broda said he expects to see 10% to 15% growth in equities next year, based on better-than-expected fundamental economic performance that will bolster corporate earnings.

But the panelists disagreed on the relative value of equities in the current environment. While Ouimet said Canadian, U.S., global and emerging market equities continue to trade at a discount, Broda said he considers most equities around the world are fair valued.

“We do not agree that undervaluation in equities is still there – we think it’s gone,” he said.

In terms of the Canadian economy generally, Ouimet expects growth to remain at subpar levels over the next year since the economy is so dependent on trade with the United States.

“The U.S. has a major bearing on what happens here in Canada,” he said. While economic indicators such as jobless claims have begun to display improvements in recent weeks, Ouimet said the U.S. economy remains fundamentally weak. He noted that small business confidence remains very low, and that personal disposable income among U.S. consumers remains extremely depressed.

“There are a lot of clouds on the horizon still,” he said.

But Ouimet also pointed to a number of positive factors for the Canadian economy. He expects domestic demand to continue to improve, and he noted that the labour market in Canada remains far healthier than the U.S. market. In addition, he said signs of a rebound in the Canadian housing market are having a positive impact on the state of consumer confidence.

“That is fuelling confidence, it’s fuelling a return to consumption,” said Ouimet.

IE