• Out-performance by US small caps likely to wane
• Insurers and diversified financials still a good bet
• Income trusts will likely divide into high and low performers

TORONTO, Feb. 3, 2005 –TD Waterhouse Canada Inc. today released its 2005 Investment Outlook which offers insight into future market trends and their impact on investment portfolios.

The Outlook also examined its 2004 predictions in light of events and found that most were accurate.

While particular investments or trading strategies should be evaluated relative to each individual’s objectives in consultation with their advisor, the following six themes should dominate the markets in 2005:

• U.S. presidential politics should have a muted effect in year one – The market should avoid the negative returns characteristic of the first year of a new presidency, when harsh fiscal medicine is generally doled out. Instead, earnings growth in the 5-6% range and equity valuations that are not excessive should result in modest equity gains.
  
  The advice for investors is to remain overweighted in equity for the moment, while keeping a sharp eye out for risks such as rising short-term interest rates.
  
  
• US small cap stocks likely to underperform – In the past three years, U.S. small cap stocks have out-performed their large cap counterparts, but they will likely underperform them in 2005. More sensitive to economic fluctuations, small cap stocks should react quickly to rising interest rates and slowing profits. As well, they are no longer the bargain relative to large cap stocks.
  
  Investors are advised to maintain their small cap portfolio weighting for now, and be prepared to pare it later in the year.
  
  
• Large caps are a good bet – There should be a shift to large companies with stable sales, earnings growth and decent dividends. Large US pharmaceuticals will likely rebound from difficulties experienced in recent years; US producers of household goods (e.g. Colgate Palmolive) should do well, and Canadian insurers and diversified financials (e.g. Manulife, Sun Life Financial and Power Financial) should have solid years, though somewhat less buoyant than in 2004.
  
  Investors should maintain their weighting of these types of large cap stocks.
  
  
• Short-term interest rates to move up modestly in 2005, with longer-term bond yields rising slightly less – This should cause a slight ‘flattening of the yield curve” Nonetheless, the tight supply of bonds should provide price support, leading TD Waterhouse to maintain a positive outlook for high-quality corporate bonds.
  
  Investors should be underweight in bonds as a whole, but among their bond holdings be overweight in high quality corporate issues.
  
  
• Income trusts will likely become divided into high-and low-quality groups – After having enjoyed immense popularity in recent years, the more difficult environment ahead makes it harder for lower-quality income trusts to meet their distribution targets to unit holders. These marginal players will likely be dealt with harshly in the market, whereas higher quality trusts with stable and sustainable distributions should outperform the broad market indices.
  
  ncome trust investors should consider populating their portfolios with high quality trusts.
  
  
• Japanese stocks should again outperform US equities in 2005 – Strong corporate earnings growth, reasonable valuations, rising exports to China, emergence from deflation and a strengthening banking sector should combine to push the Nikkei Index higher in 2005.
  
  Investors should therefore consider overweighting Asian stocks in their portfolios for 2005.
  
  

“2005 should offer investors who pursue these themes a year of steady, modest growth”, says Robert Gorman, Vice President, Managed Investment Solutions<