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National Bank says it’s time to cut cash positions and load up on Canadian stocks

Enthusiasm comes after weak second quarter for energy stocks, banks and materials.

Canada's stock market is the weakest in the developed world in 2017, with a year-to-date gain of just 0.4 per cent. But rather than give up, consider buying.

That's the view of Stéfane Marion, chief economist and strategist at National Bank Financial. He changed his asset allocation on Wednesday, reducing cash in favour of Canadian stocks.

The allocation to cash falls to 7 per cent from 10 per cent previously, while the allocation to Canadian stocks rises to 24 per cent from 21 per cent.

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His enthusiasm for Canadian stocks follows a weak second quarter for energy stocks, banks and materials.

However, he expects a rebound in the second half of this year, reflecting a sound domestic economy and rising corporate profits.

"Our decision is based on our view that global economic momentum will improve in the second half of the year," Mr. Marion said in a note. "This development argues for a reflation trade scenario, implying a somewhat weaker U.S. dollar and stronger commodity prices."

He also pointed out that Canada's S&P/TSX composite index is cheap relative to the S&P 500. He measures this by looking at the difference, or spread, between the two indexes' 12-month estimated price-to-earnings ratios: The spread is at its widest since 2004, with the valuation of TSX index well below the S&P 500.

Mr. Marion also lowered his allocation to U.S. stocks to 17 per cent from 20 per cent, with the difference going to foreign stocks.

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