Equities offer better relative value than fixed income investments in the next six to 18 months, according to a new quarterly Market Outlook report from TD Waterhouse.

The first edition of the report, which is drawn from the views of the TD Wealth Management Asset Allocation Committee, recommends overweighting equities versus fixed income. The report points out that stocks remain reasonably priced, with the S&P 500 trading at a multiple in line with the long-term average.

“The weight of evidence is on the side of the bulls and we are recommending an equity overweight,” said Bob Gorman, vice president at TD Waterhouse and member of the TD Wealth Management Asset Allocation Committee.

The report notes that dividends in a number of sectors are abnormally high relative to bond yields. For example, the yield of the Canadian bank stocks is currently above that of the Government of Canada 10-year bond yield, which TD considers rare.

The firm expects investors to increasingly emphasize dividends as a larger element of total return.

“We expect stocks displaying growing dividends to garner increasing attention in 2010,” said Gorman.

Following a year in which strong commodity prices helped equities in Canada and emerging markets outperform, returns in these regions are expected to moderate in 2010.

“We recommend a neutral stance across geographic regions, highlighting a more cautious view,” Gorman said.

In terms of fixed income, corporate bonds continue to present better value than government issues, according to the report. It points out that the incremental yield and the relatively short duration of corporate bonds makes their investors less susceptible to any increase in interest rates.

“TD Waterhouse anticipates that corporate spreads should narrow modestly from here and therefore recommends corporate bonds over government bonds,” the report says.

Meanwhile, currency fluctuations in 2010 are not likely to be as dramatic as they were last year. While TD Waterhouse holds a positive view toward both commodities and the Canadian dollar, it says upward moves in Canadian currency will not be dramatic enough to discourage foreign diversification.

IE