Booming M&A Market and strong resource prices to drive TSX levels to 15,000, according to a new CIBC World Markets report
TSX expected to return 18.5 per cent in 2007 TORONTO, May 2 /CNW/ - CIBC (CM: TSX; NYSE) - With record private equity activity feeding a booming M&A market and continued strength in global resource prices, the TSX composite will hit a record 15,000 by year end, CIBC World Markets' latest Canadian Portfolio Strategy Outlook report predicts. The 15,000 target will provide investors with a total return, including dividend yield, of 18.5 per cent in 2007. This would mark the fourth consecutive year that the TSX's total return would top that of the S&P 500. In addition to helping fuel another year of strong earnings growth, the report predicts that further M&A activity will also likely increase valuations for firms on the TSX. "Premiums continue to hold up, with acquirers recently paying nearly 20 per cent above the market price, on average, to land their targets," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets. "Such activity has already had an appreciable impact on boosting performance in such sectors as utilities, telecoms, gold and base metals." M&A activity in the TSX continues to run at a robust pace after setting a record in the third quarter last year on a number of blockbuster deals in the mining sector. Recent activity has focused on the telecommunications sector. Mr. Rubin notes that a new twist in the mergers and acquisitions game is the rapidly expanding pace of private equity leveraged buyouts. Last year, buyout funds put nearly US$11 billion into Canadian investments, more than double the prior year's pace. That could easily be dwarfed by this year's activity with a C$30 billion plus deal in the telecoms currently being played out. Given the typical leverage, private equity funds have the capability to take control of trillions in corporate assets. "The recent resurgence of the leveraged buyout (LBO) market after its demise in the late 1980s has been driven by two factors-decade low interest rates and very tame credit spreads on highly leveraged loans," notes Mr. Rubin. "The initial LBO craze was driven by the innovation of the junk bond market. Today's market relies partly on collateralized debt obligations (CDOs) that enable banks to repackage and resell leveraged loans in an increasingly liquid and competitive market." He adds that over the last six years spreads on ever more leveraged loans have come in from 500 basis points off LIBOR to as tight as 230 basis points given that the low rate of defaults has encouraged more and more investors to pursue these highly attractive yields. As more investors get into this market, financing terms will become even more attractive until such time that an economic downturn inhibits debt servicing and leads to rising defaults. "The big winners from LBOs are, of course, those holding equities in targeted companies-typically businesses whose stock market performance has disappointed, but which have enough stability in cash flows to sustain a high debt multiple," adds Mr. Rubin. "The big losers are bondholders lacking sufficient covenants to prevent a piling on of additional debt, as witnessed in Canada's telecom sector of late." As a result, CIBC World Markets is lowering its expected returns from the bond market due to ongoing erosion in corporate spreads from the growing threat of leveraged buyouts. Consequently, two percentage points of weighting has been moved from bonds to stocks, raising its equity weighting to 68 per cent, 12 percentage points above benchmark. Bonds now stand at 32 per cent with zero in cash. Within its equity portfolio, CIBC World Markets is cutting its overweight in financial stocks by two percentage points. A crumbling U.S. housing market has yet to adversely impact consumer demand and a near-90-cent dollar has yet to put the brakes on economic growth in Canada. This has made the prospect of an easing of central bank rates in both countries more distant. CIBC World Markets is also moving a percentage point from financial stocks to base metals stocks. Copper and nickel prices are near all-time highs, while soaring metals prices are spurring widespread consolidation in the global mining and metal processing industries. It has also moved a percentage point of weighting from financials into the utilities sector in anticipation that the sector may be the target of leveraged buyouts from firms with stable cash flows. The Portfolio remains 3 1/2 points overweight energy stocks, in order to capitalize on CIBC World Markets forecast of US$70-plus crude prices in the second half of the year and new record prices for uranium as global demand for nuclear power continues to benefit from rising world-wide concern about greenhouse gas emissions. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/psmay07.pdf. CIBC World Markets is the wholesale and corporate banking arm of CIBC, providing a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.
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For further information: Jeff Rubin, Chief Economist and Chief Strategist, Managing Director, CIBC World Markets at (416) 594-7357, firstname.lastname@example.org or Kevin Dove, Communications and Public Affairs at (416) 980-8835, email@example.com; Archived images on this organization are searchable through CNW Photo Archive website at http://photos.newswire.ca. Images are free to accredited members of the media.