The strong finish to markets in 2006 shouldn’t take away from reasonably rosy prospects for 2007, says UBS Securities Canada Inc., in a new report. The firm remains positive on stocks for the coming year.

“Investors appear to have been rattled by either the strong finish to 2006, or the bumpy start to 2007 (or both),” it notes. “So we start by highlighting that over the last 50 years, somewhat better than normal equity gains have followed a stronger than usual rise to year-end.”

It also points out that last week’s sharp drop in the TSX has put the index, “well below our fair value estimate of 12,900, and would translate to a double-digit return to our 13,750 target.” As a result, it is bumping up its equity allocation by 5% to 60%, and lowering cash.

On to the fundamentals, UBS says that the economy’s current performance, “is still consistent with a soft landing, and we believe only if the ISM index dips below 45 (not 50) should a hard landing scenario be considered.”

Even so, whether or not the economy lands softly, it notes that the TSX has still performed well in the year after forward earnings slowed through 15% (currently they are 16%).

“Finally, neither the TSX nor the S&P 500 have declined during the 3rd year of a Presidential cycle, and though positive economic data may cause the Fed to defer cuts, we think the hikes needed to undermine that scenario seem unlikely.”