“This year’s investment themes are highly consistent with those we cited in 2005,” says Bob Gorman, vp, managed investments. “Overall, investors can expect steady, but not spectacular progress in their portfolios in 2006.”

TD says North American equity returns will be in the mid-single digits. The bank adds that energy prices could pull back to the mid-$40 range, impacting Canada’s energy sub-index.

U.S. small cap stocks are expected to underperform broad market indices. TD says U.S. small caps will be negatively impacted by the disappearance of the valuation gap between them and their large cap counterparts.

Defensive, large cap stocks will are forecast to lead markets. Large cap North American companies with stable sales, earnings and dividends will continue to be good bets in 2006, as they were last year. TD suggest investors focus on diversified financial institutions and insurers such as Manulife, SunLife Financial and Power Financial.

In its fixed income forecast, TD says hort-term interest rates will rise, and the yield curve will flatten. This will result in bond investors earning a coupon of approximately 4%, TD says. Corporate bonds are expected to modestly outperform government issues.

Income trust total returns will be lower ss capital gains diminish and income represents a higher proportion of investors’ returns. TD adds that the division between strong and weak income trusts will become more pronounced in 2006 as more lower calibre income trusts are unable to meet their aggressive distribution targets and are forced to cut pay-outs to shareholders and subsequently experience declining share prices.

As for international markets, the Japanese stock market will outperform U.S. equities for the third consecutive year. TD says the Nikkei index will continue its advance in 2006, driven by solid corporate earnings growth, decent valuations, strong exports to China, an improving banking sector and an improved political environment.