Economists at National Bank Financial are predicting a secular bull market in resources.

In a recent financial commentary by Clément Gignac, chief econmist, says “We see a secular bull market in resources somewhat similar to that of the 1970s, we plan to remain overweighted in base metals, golds, energy and paper and forest products as long as China keeps its current peg to the U.S. dollar and the Fed stays out of the picture.”

“We remain underweighted in Canadian companies with no pricing power, such as industrials and staples,” he adds.

NBF says that its baseline scenario for 2004 and 2005 projects the strongest two years of synchronized world growth since 1977 and 1978. On this basis, it favours the S&P/TSX over the S&P 500 because of the former’s higher exposure to materials and energy (30% of the Canadian index, 8% of the U.S.). “Despite a risk of stock market consolidation after the recent run-up, we are maintaining our equities exposure at 60% (10% above benchmark). For the time being, our conservative year-end target for the S&P/TSX is unchanged at 9,200, based on earnings of $480 per share,” says Gignac.

The firm notes that productivity gains have so far been accruing to firms rather than workers. It says that it expects that a combination of currency depreciation and offshoring will keep U.S. profits growing faster than nominal GDP until late 2005. “With Fed chairman Alan Greenspan ready to wait before pulling the trigger, valuation still tilts in favour of equities. The S&P 500 is trading at less than 20 times our forecast of 2004 operating earnings ($63 a share), while 10-year U.S. Treasuries are yielding about 4%. Our conservative year-end target for the S&P 500 is unchanged at 1225,” says Gignac.

Looking at the financials sector, which NBF rates a market weigh, it is downgrading the Real Estate industry to underweight “on account that the recent price increase resulted in the industry’s valuation becoming less attractive. Earnings revisions were also very low compared with the rest of the market.” Instead, NBF favours diversified financial companies. “High earnings revisions coupled with appealing valuation levels and strong momentum account for our positive recommendation.”

Gignace also warns, “While we do not expect the Fed to hike its rates until early in 2005, and markets will probably anticipate it months before it actually happens. The movement will be adverse for financial companies.”