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The TSX index is displayed on an electronic board outside Scotia Place in Toronto on March 3 2016.Fred Lum/The Globe and Mail

The recent relief rally in Canadian stocks, rather than a temporary bounce from a state of extreme pessimism, is more likely the start of new phase of superior domestic returns, according to a new forecast by RBC Dominion Securities.

"We believe the end of the five-year period of underperformance of the S&P/TSX is at an end," Matthew Barasch, RBC's new head of Canadian equity strategy, said in a report. "We believe the S&P/TSX is in the early stages of outperformance against the S&P 500 and other global equity benchmarks, which is likely to last into 2017."

Mr. Barasch put a one-year target of 15,200 on the S&P/TSX composite index, representing an 11-per-cent gain, which would amount to one of the more bullish Canadian forecasts.

While sentiment toward the Canadian economy and Canadian stocks is still tilted to the downside, the prospects for domestic equities are heightened by the continued recovery in energy prices, with additional support coming from fiscal stimulus, monetary accommodation, economic stabilization and a "favourable technical setup," Mr. Barasch said.

"It's easy to continue to harp on the problems of the past," he wrote, noting that both household debt and housing prices continue to inform those who would short Canada.

"However, we believe that with most commodities washed out and the two key commodities for Canada – oil and gold – offering a compelling setup, the time to go overweight Canada has arrived."

For five years, investors doing just the opposite have generally been rewarded for limiting their exposure to Canada. Over that time, the composite has underperformed most of its developed-market peers, some of which, including the S&P 500, by a huge margin.

As a result, the bets against Canada have piled up in response to the decline of the global commodity complex.

"We believe that most global money managers are underweight Canada, while many hedge funds through short positions on the Canadian dollar, oil and the Canadian banks have been betting heavily against Canada," the report said.

"Add to this a shift over the past five years amongst Canadian-based institutional and retail investors to the U.S. market, and there are very few investors worldwide that have their pockets full of Canadian stocks."

The time to reverse the short Canada trade has arrived, Mr. Barasch said.

First and foremost among the trends supporting Canadian stocks is a higher oil price. RBC's commodity strategists expect U.S. crude oil to be priced at around $50 (U.S.) a barrel at the end of this year and about $60 at the end of next.

And of the eight individual years in which crude rose by at least 10 per cent over the past two decades, the composite has beaten the S&P 500 every time, and by an average of 7.5 per cent, according to the report.

Higher oil prices would help drive Canadian earnings, as would the continued stabilization of the Canadian economy. The transition of the domestic economy away from energy and toward other export sectors has "begun to take shape," RBC said.

A brighter macro backdrop lifts RBC's expectations for earnings growth to 24 per cent this year and another 11 per cent next year.

On a sector basis, the report recommends overweighting oil and gold stocks on commodity price gains, in addition to real estate investment trusts, which are more attractively valued than other income stocks.

Canadian utilities and telco stocks, on the other hand, merit caution as a result of high relative valuations.

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