Heading into the final quarter of 2017, expect Canadian stocks to outperform U.S. stocks.

That’s because of “a highly forgiving valuation discount, still robust economic activity and improving commodity prices,” says a Q4 global outlook report by BlackRock, with an introduction by Kurt Reiman and Aubrey Basdeo. Reiman is BlackRock’s chief investment strategist for Canada, and Basdeo is head of Canadian fixed income.

Reiman and Basdeo say the Canadian stock market underperformed in the first half of 2017 because of too little exposure to growth sectors. The Canadian market “would stand to benefit if the value style is rewarded, as we expect,” they say.

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The best investing opportunities will come from non-U.S. international equities, such as from Europe, Japan and emerging markets. “We generally like the technology and financial sectors,” add Reiman and Basdeo.

Read: Global growth makes way for equities exposure

They’re cautious on fixed income due to monetary tightening. At the same time, they say long-term bonds are a useful buffer against equity market selloffs triggered by geopolitical conflicts.

“We favour a globally diversified holding of credit risk for the added yield and reduced interest rate risk,” says the report. “But avoid large overweights given expensive valuations and a belief that risks are starting to tilt to the downside.”

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Here are other Canadian highlights from the report:

  • Canadian real GDP will be about 2.25% over the next year. “The pace will likely remain strong enough for output gaps to close and support corporate revenues,” says the report.
  • Despite the loonie’s recent rise, Canada is well positioned to take advantage of global expansion and heavier trade volumes. “Moreover, rising commodity prices alongside a weakening greenback and steady growth in global demand bode well for Canada’s natural resources sector,” says the report.
  • Caution is warranted as the Bank of Canada begins to normalize monetary policy in the face of high household and corporate credit growth. “A sharp tightening of financial conditions could prove to be too much for debt-saddled Canadian consumers,” says the report. “Fortunately, inflation is still well below the central bank’s target. This means the BoC can choose to go slow as it guides short-term interest rates higher.”

For full themes and investing details, read the full report.

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