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Press Kits - Investing - 2008 Fall Investment

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Market volatility is here for the short term but North American indices will improve in 2009, predicts TD Waterhouse

  • Large caps will outperform small caps in challenging economic environment
  • Typical Canadian bond returns will be in 4.0 - 4.5% range, same as 2008
  • Emerging markets will again require caution in 2009

TORONTO, Nov. 27 /CNW/ - TD Waterhouse today released its 2009 Investment Outlook, offering insight into future market trends and their impact on investment portfolios. It predicts that while market volatility will continue in the very near term, it will begin to decline from recent record levels and market indices will rise in 2009.

"Looking ahead to 2009, the key questions on the minds of investors are when the heavy volatility will end, what the 'floor level' of the current bear market will be, and when will stocks begin to recover," says Bob Gorman, Chief Portfolio Strategist, TD Waterhouse.

Gorman predicts the following six themes will dominate the markets in 2009:

U.S. Market Outlook

1. The U.S. stock market, after experiencing continuing pressure in the year term due to tax loss selling, and hedge fund and mutual fund redemptions, will rise in 2009. Factors contributing to this outlook include:

  • Valuations are now depressed, with the &SP 500 trading at perhaps 11.5 - 12 times forecast 2009 earnings.
  • The bond market is supportive, with a wide gap between the U.S. 10-year Treasury yield and stocks' earnings yield.
  • Credit is beginning to loosen as LIBOR rates retreat and the TED Spread (i.e. the difference between the interest rates on interbank loans and short-term U.S. government debt) shrinks.
  • Monetary and fiscal policies are accommodative and designed to stimulate the economy.
  • There are high levels of cash on the sidelines relative to market capitalization.
  • There are strong purchases by company officers and directors of their own company's shares. (This is often a positive indicator that shares have reached attractive valuations and represent good buying opportunities.)

2. Large cap stocks are once again recommended in 2009: "Given their greater financial stability and low valuations, we feel that large caps offer the best prospective risk/reward relationship in 2009," says Gorman. "Small caps are more economically sensitive and respond more acutely to the ups and downs of the economy," continues Gorman. He points out that historically, they outperform large caps coming out of a recession, but the extremely low valuations attached to the highest quality large cap companies gives them the best potential returns relative to risk in 2009.

Canadian Stock Market

3. After a decline of about 49% from its peak, Gorman says the TSX is bottoming in this range and will advance in 2009. "Factors contributing to this outlook are largely the same as those cited for the U.S. stock market. As in the U.S., large cap stocks will represent the best risk/reward relationship."

Canadian Bond Market

4. Typical bond returns are expected to be in the same 4.0 - 4.5% range in 2009 as in 2008. Investment grade corporate bonds will outperform government issues in 2009. This will reflect three factors:

  • Corporate spreads will stop widening as credit markets stabilize.
  • Corporate issues will offer a higher stream of income compared with government bonds.
  • There will be some reversal of the flight to quality as government bond yields increase modestly.

The Outlook also predicts a rally in high yield bonds in 2009. "High yield debt performed poorly in 2008, reflecting a dramatic widening of spreads due to concerns about rising default rates and forced liquidation by fund managers," says Gorman. "These same issues will weigh on high yield debt in the near term. However, high yield bonds are highly correlated with equities, and thus an equity rally in 2009 will lift high yield bonds as well."

Major Foreign Stock Markets
5. European and Japanese equities will record positive returns in 2009. While current economic weakness and its impact on corporate earnings is the major headwind for both markets, valuations are very low, especially in Europe where P/E multiples are in the 10-11 range and dividend yields approximate 4%.

Emerging Stock Markets
6. Caution regarding this asset class is warranted in 2009. While there will likely be a superb buying opportunity for emerging markets in the not-too-distant future, caution is recommended for the present and avoidance of direct exposure. Factors contributing to this outlook include:

  • While economic growth rates will remain well above those in the developed countries, adaptation to lower growth will likely prove difficult for many of these countries and their companies.
  • There is over $110 billion in emerging market corporate debt which will have to be re-financed in a difficult environment in 2009.
  • There may be some difficulties in Chinese real estate, which could spill over into their banking system.

2008 Predictions and Results

The Outlook also examines its 2008 predictions and finds that four out of seven were accurate.

"A year ago, we predicted that strong fundamentals would outweigh the impact of the sub-prime lending crisis, the economy would stay out of recession, and markets would stay out of bear territory," says Gorman. "This prediction was overturned by the unprecedented decline in global financial markets and commodity prices."

Here is how TD Waterhouse's themes for
2008 played out:

Prediction No. 1: The U.S. stock market would rise for the sixth consecutive year.
Outcome: This has proven incorrect. A year ago, the Outlook forecast that a declining Canadian dollar would boost the value of U.S. holdings for Canadian investors, thereby producing positive single-digit returns in U.S. equities. While the Loonie has fallen about 21% year-to-date and has indeed cushioned the decline in the U.S. market for Canadians, total returns have still been negative.
Prediction No. 2: U.S. large cap companies would outperform their smaller counterparts in 2008.
Outcome: This forecast has proved accurate to date. The DJ30 has outperformed the &SP 100, which has outperformed the &SP 500, which has narrowly outperformed the Russell 2000.
Prediction No. 3: The Canadian stock market would rise for a sixth consecutive year in 2008, recording a single-digit advance.
Outcome: This has proven incorrect.
Prediction No. 4: A rotation would begin to be seen from the cyclical sectors (focussed on commodities) to the less cyclical sectors as commodity prices fell in response to a slowing global economy.
Outcome: This has occurred in the second half of 2008; however, there were no offsetting gains in the more defensive sectors due to the worsening credit crisis.
Prediction No. 5: Bond investors would earn total returns of between 4.0 - 4.5% in 2008.
Outcome: This has proven correct, especially in the short- and mid-term segments of the market.
Prediction No. 6: Europe would out-perform Japan in 2008 generating positive, single-digit returns.
Outcome: While this has been true to date in terms of local currency, it has not been the case when expressed in Canadian dollars given the strengthening of the yen and the weakening of the euro due to declining interest rates and economic weakness. The Outlook's forecast of modest but positive European equity returns in 2008 was incorrect.
Prediction No. 7: We recommended caution for emerging markets in 2008.
Outcome: This has proven accurate. The Shanghai Composite Index has fallen over 60% in the year to date, with other BRIC countries recording similar losses.

About TD Bank Financial Group
The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Financial Group. TD Bank Financial Group is the seventh largest bank in North America by branches and serves approximately 17 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 and TD Insurance; Wealth Management, including TD Waterhouse and an investment in TD Ameritrade; U.S. Personal and Commercial Banking through TD Banknorth and TD Bank, America's Most Convenient Bank; and Wholesale Banking, including TD Securities. TD Bank Financial Group also ranks among the world's leading on-line financial services firms, with more than 5.5 million on-line customers. TD Bank Financial Group had CDN$509 billion in assets as of July 31, 2008. The Toronto-Dominion Bank trades under the symbol "TD" on the Toronto Stock Exchange and New York Stock Exchange.

For further information: to receive a copy of the 2009 Investment Outlook, or to schedule an interview with Bob Gorman, please contact:

Maria Leung,