Canadians could benefit from reallocating more of their assets from cash and bonds to equities, but it will likely take time for investors to regain enough confidence to take on more risk, strategists at the Bank of Montreal said on Tuesday.

During a panel discussion on markets and the economy, Paul Taylor, chief investment officer at BMO Harris Private Banking, said equity market returns will likely soften in the next few years, but he expects they’ll still outperform bonds.

He expects the S&P/TSX composite index to reach a target of about 14,200 in 2011.

“That provides some upside. More meager returns, but certainly some upside for equities, and returns that easily outpace cash and bonds,” Taylor said.

He’s particularly bullish on cyclical sectors such as energy, consumer discretionary, technology and materials.

But Taylor said many retail investors need to see more economic stability before they’ll be willing to re-enter the stock market.

“We have not seen any sort of a reallocation, particularly on the part of retail investors, from the safety of cash and bonds to riskier assets – in particular, domestic equities,” he said. “The longer the economy is not seen to be breaking, the greater the likelihood that the average retail investor will in fact develop the confidence to reallocate into equities. How long that takes remains to be seen.”

Signs of greater economic stability are beginning to show, according to Douglas Porter, deputy chief economist at BMO Nesbitt Burns. He expects 2011 to bring more job creation, higher interest rates, improving export activity and an appreciating currency for the Canadian economy.

Specifically, he expects the unemployment rate to fall below 7% by the end of the year, interest rates to rise by a full percentage point, and the loonie to average a level slightly above parity with the U.S. dollar.

“We do look for growth to be driven more by business investment in Canada, and by less drag from net exports,” he said.

Overall, Porter forecasts that the Canadian economy will grow by about 2.7% in 2011 – a slightly slower pace of growth than this year, as policymakers shift from stimulus to restraint.

He expects the country’s three most western provinces to lead, with GDP growth of about 3.5%, thanks to their relatively strong fiscal positions and a rebound in commodity prices.

BMO strategists have high hopes for materials in 2011. Bart Melek, global commodity strategist at BMO Capital Markets, said he expects commodities to benefit from a combination of strong demand from emerging markets and investor demand.

“We’re seeing fundamentally tighter supply-demand fundamentals for a vast majority of these commodities,” he said.

Precious metals are set to perform particularly well, with Melek predicting that gold will average a price between US$14,000 and US$1,500 an ounce in 2011. Palladium and platinum will also outperform, and copper will thrive on a combination of robust demand and limited supply, he said.

IE