Canada’s stock market could well outperform the rest of the world over the next year because of an improvement in resource stocks, a gradual rise in the Canadian dollar and low interest rates, said Derek Holt, the vice president, economics, at Scotia Capital.

He said the recent bear market rally had been based on dubious longer-run fundamentals and would likely result in profit taking, however, the Toronto Stock Exchange looked well placed to outperform other markets in the medium term.

Mr. Holt said:

“The heavy resource weighting should benefit from our forecast for a modest further rise in commodity prices into next year, and its financials focus could well benefit from a policy-induced increase in global risk appetite. Higher resource prices won’t bring back large scale resource investments for a long while yet, but the first round effect will flow through earnings.”

He noted the TSX had a lighter weighting of the hard hit consumer stocks compared with the United States.

Also helping Canada would be the likelihood of Canadian dollar appreciation over the next 2-3 years. Mr. Holt said this should keep a home bias on domestic investments while attracting cross-border foreign exchange flows.

“Parity over the next few years could well arise through higher commodities and improved risk tolerance out of the U.S. dollar with all of its longer run structural imbalances and back into the high yielders.”

Lastly, Mr. Holt said the Bank of Canada would likely hold the benchmark interest rate, currently at 0.5%, at a low level for a longer period than factored in by the market, providing some value in the Canadian yield curve.