Analysts at National Bank Financial Group have raised their recommended equity allocation to a benchmark weight, boosting their U.S. equity weighting to 25%, and cutting their cash recommendation to zero.

In its latest strategy update, NBF recommends upping equity exposure in a balanced portfolio to 65% — 25% in each of Canadian and U.S. equities, and 7.5% in each of emerging markets and EAFE equities. The rest of the recommended portfolio is comprised of 29% Canadian bonds and 6% real return bonds.

The big shift in the latest call is to reduce cash from 10% to zero, and boosting U.S. equities from 15% to 25%.

The report finds that the global economy “is on the mend”, as policymakers’ efforts are gaining traction, “credit markets are normalizing and leading indicators are pointing in the right direction.”

“Economic growth is around the corner and central bankers will sooner rather than later be forced to implement strategies for exiting their current policy stance. This leaves us more attracted to equities than before,” it explains.

Based on earnings expectations and historic P/E ratios, it says that a reasonable target for the S&P 500 a year from now is 1120, up 25% from current levels. For the S&P/TSX, the similar target would be 11600, up about 17%.

“Recent market action is consistent with our sector rotation, which emphasizes early cyclicals. We think they will be the best performers for the duration of the recession,” it says. “If history is a guide, late cyclicals such as energy and materials will do better later, in the first phase of expansion. We accordingly reiterate our recommendation to overweight financial, IT and consumer discretionary stocks.”

“The main change to our sector rotation is to downgrade the gold industry from market-weight to underweight,” it adds. “We expect that inflation expectations will remain well-anchored in the coming months and that recent improvement in the economic data will greatly reduce the need for a haven.”

“Given the very strong negative correlation between bullion and the U.S. dollar since 2002, we now see gold as especially vulnerable to a cyclical rebound of the greenback,” it adds.

IE