• Despite macroeconomic headwinds, both U.S. and Canadian stocks should advance
• Canadian bond returns will likely be modest, in the 1-3% range
• Northern Europe should generate mid-single digit returns and remain the best performing region among major international markets

TORONTO, Dec. 15, 2011 /CNW/ - TD Waterhouse today released its 2012 Investment Outlook, predicting that stocks will resume their advance in 2012 and outperform bonds.

"Despite a year of economic difficulties in Europe, I'm confident the stock markets will advance in 2012," says Bob Gorman, Chief Portfolio Strategist, TD Waterhouse. "We will likely be in a relatively low growth, low inflation environment that should favour large cap stocks, which generate a good part of total return from substantial, rising dividends."

Gorman states that the following six themes will likely dominate the financial markets in 2012:

U.S. Stock Market

1. U.S. stocks should move higher again in 2012, despite the macroeconomic headwinds they continue to face, including: the European sovereign debt crisis, the American federal deficit, the ongoing potential for a double-dip recession and problematic U.S. housing and commercial real estate.

Positive factors for the U.S. stock market in 2012 remain similar to those cited for 2011:

• The U.S. should have moderate economic growth (in the 2-3% range) plus continued low interest rates and inflation.  Despite ongoing stock market volatility, this should provide an environment in which blue chip equities can provide solid returns.
• Valuations are reasonable based on estimated S&P 500 earnings. Relative to fixed income, stocks are very good value, with an earnings yield which is the widest gap in a quarter century compared to bond yields. Dividends will likely see continued growth in the years ahead.
• Bolstered by solid earnings and limited capital expenditures in recent years, corporate balance sheets and liquidity are arguably the strongest in half a century.
• Merger and acquisition activity rose modestly in 2011, with a sharper increase expected in 2012. This reflects corporate liquidity, low borrowing costs, improving credit availability and low valuations of target companies.
• With S&P 500 companies deriving roughly 40% of their earnings from outside the U.S., including 10% from emerging markets, their shares represent a good way to benefit from continued global growth.

In summary, we expect U.S. stocks to rise in line with earnings growth and record a high-single digit return in 2012.

2. U.S. large caps should outperform for a second successive year.

• A substantial valuation gap still exists between the more expensive small caps and the cheaper large firms, so the rotation into the latter should continue.
• Dividend growth stocks with attractive valuations plus substantial, growing dividends should generate good total returns for investors.

Canadian Stock Market

3. Canadian stocks should resume their advance in 2012.

• Growth of both the economy and corporate profits will likely be moderate in 2012 and the S&P/TSX Composite should reflect that, recording an upper-single digit return.
• Less economically-sensitive sectors should be among the better investments in this environment, with dividend growth stocks providing solid income and total returns.

Canadian Bond Market

4. Bond returns should be modest in 2012, likely in the 1-3% range.

• Yields are very low and may well rise somewhat if the flight to safety ebbs.
• For more risk-tolerant investors, there may be value in high yield bonds today.

Major Foreign Stock Markets

5. Northern Europe should again be the best region among major international markets.

• In what will likely be a soft year for the European economy, its broad indices should generate mid-single digit returns and the focus should remain on the large caps with global reach in defensive industries.
• These stocks are characterized by low P/E multiples that discount a lot of bad news and high dividend yields that provide income and share price support.

Emerging Markets

6. Emerging markets will likely see improved results in 2012.

• After underperforming global markets in 2011, valuations in emerging markets have become more attractive, while balance sheets remain strong and growth remains attractive.
• We expect to see improved results from emerging market equities in 2012.

2011 Predictions and Results

Much of 2011 was characterized by a tug of war between macroeconomic concerns - chiefly in Europe, the U.S. and China - and positive corporate fundamentals.  Here is what transpired in 2011, and why.

Prediction No. 1:
U.S. equity markets would advance for a third successive year and the S&P 500 Index would record a low-double digit advance.

Result:
While four factors unfolded as expected: (1) the U.S. avoided a double-dip recession and deflation, (2) valuations were reasonable, (3) monetary policy was accommodative with short-term interest rates around zero and (4) corporate balance sheets and mergers/acquisitions were strong, the political environment was unexpectedly toxic, exemplified by the debt limit debate.  After approaching our target return by late April, stocks weakened over the balance of the year, chiefly on concerns about Europe.

At the time of writing, the S&P 500 was little changed for the year, below forecast.

Prediction No. 2:
U.S. large cap stocks would outperform smaller companies' shares.

Result:
After a decade-long period in which small caps had out-performed their larger cousins, a large valuation gap had emerged and we anticipated a rotation of market leadership from the small companies to the large. This was very pronounced, with large caps outperforming by a wide margin.

Prediction No. 3:
The S&P/TSX Composite would rise for a third successive year and register a high-single digit return.

Result:
As in the U.S., the index approached its target in the spring, then declined on concerns surrounding Europe and possible recession, and was in negative territory as year-end approached.

Prediction No. 4:
Bonds would generate modest returns of up to 3%, with corporate issues outperforming government bonds.

Result:
Investors' flight to safety pushed bond returns ahead of forecast, with corporate and government issues posting similar returns.

Prediction No. 5:
Northern Europe would lead the major international markets and record an upper-single digit advance.

Result:
While the large cap, northern European consumer companies fared quite well, the financial and energy sectors lagged.  At the time of writing, the indices were below forecast.

Prediction No. 6:
China would be the best-performing of the major emerging markets, which would post upper-single digit returns.

Result:
China was the best performer in a dismal group, which recorded negative returns for the year.

About TD Bank Group
The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Group (TD). TD is the sixth largest bank in North America by branches and serves approximately 20.5 million customers in four key businesses operating in a number of locations in key financial centres around the globe: Canadian Personal and Commercial Banking, including TD Canada Trust, TD Insurance, and TD Auto Finance Canada; Wealth Management, including TD Waterhouse and an investment in TD Ameritrade; U.S. Personal and Commercial Banking, including TD Bank, America's Most Convenient Bank, and TD Auto Finance U.S.; and Wholesale Banking, including TD Securities. TD also ranks among the world's leading online financial services firms, with more than 7.5 million online customers. TD had CDN$686 billion in assets on October 31, 2011. The Toronto-Dominion Bank trades under the symbol "TD" on the Toronto and New York Stock Exchanges.

About TD Waterhouse
TD Waterhouse represents the products and services offered by TD Waterhouse Canada Inc. (Member - Canadian Investor Protection Fund), TD Waterhouse Private Investment Counsel Inc., TD Waterhouse Insurance Services Inc., TD Waterhouse Private Banking (offered by The Toronto-Dominion Bank) and TD Waterhouse Private Trust (offered by The Canada Trust Company).