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markets

MARK BLINCH

UBS Securities Canada Inc. projects the S&P/TSX Composite Index will jump 18 per cent to 13,500 within a year.

"We are upgrading our TSX target to 13,500 to reflect that while the mid-cycle may not have arrived, we believe it is at least in sight," strategists George Vasic and Garry Cooper say in a report.

They noted that their previous target of 11,000, issued six months ago when the index stood at 7,629, was based on what they pegged as "conservative" assumptions.

"And though the revised target may seem high, we view it as still somewhat conservative," they said.

In their research note, the strategists noted that the index's average price-earnings ratio tends to rise when profits decline, but then hold steady when earnings are on the rise again.

"Investors tend to underestimate the tendency for PEs - whether measured on a trailing or forward basis - to rise quite sharply when earnings slow. And the bigger the drop in earnings, the larger the jump in PEs (as in 1990-92, when earnings declined about two-thirds)."

The companies on the index are trading for about 14 times analysts' profit forecasts for the next 12 months. The strategists consider this cheap, in relation to other years when the economy was also challenged and expect the multiple to increase to 15.9 by next year.

The "most important catalyst" for stocks has been the drop in corporate bond yields, they said, which were about 7.5 per cent six months ago and are now less than 6 per cent. This has driven investors toward the growth potential in stocks.