Strong economic, corporate fundamentals will prevail over credit market fears: CIBC World Markets report
TORONTO, Aug. 16 /CNW/ - CIBC (CM: TSX; NYSE) - Financial markets are expected to recover from current jitters as brisk growth in the global economy, solid corporate fundamentals, and if necessary, rate cuts from central banks, overcome continuing bad news in the US subprime mortgage market, according to a report from CIBC World Markets. "Odds are that in the North American financial market, fear will be overcome by favourable economic news, and that the current jitters will be seen, with hindsight, as a buying opportunity for equities," says Jeff Rubin Chief Economist and Chief Strategist at CIBC World Markets. He adds that the "underlying global growth and profit fundamentals remain supportive for equities and corporate credit quality. US mortgages aside, current equity and credit market selling pressure is more about fear than reality." Mr. Rubin says the credit squeeze resulting from subprime defaults will directly hit the ongoing housing recession in the US. However, the contagion will likely remain concentrated there. "The hit to borrowing costs in the Canadian economy looks manageable," he says. "Despite the huge widening in credit spreads, and the reduction in liquidity in certain areas of the commercial paper market, there has not been a systemic rise in defaults in the Canadian household debt market, or the global corporate debt market, even in the segment financing highly-leveraged buyouts," says Mr. Rubin. He also notes that Canadian corporate balance sheets are in excellent shape. And while the spill-over of fear has been significant in equities, high-yield currencies and commodities markets, the responses "look like tremors rather than a full scale earth quake," says Mr. Rubin. He adds that the 11% equity retreat in Canada is a correction that is frequently seen during a generally bullish trend, including a larger sell-off earlier in the bull run in 2006. In addition, "global growth has been twice as brisk as in the last credit shock in 1998, when much of the world outside North America was mired in recession following the 'Asian Crisis'," says Mr. Rubin. "With global growth holding up in what is still a story centred on US housing credit, the TSX overweight in energy and resources should prevent a replay of the 1998 pullback." "Canada's underweight in consumer stocks, which might be impacted by more sluggish American household spending, could also be of benefit, and Canada's stronger housing market implies less stress on household credit quality," says Mr. Rubin. In the near-term however, Mr. Rubin expects the labyrinth of structured assets "will amplify market perceptions of risk." However, "markets could rationally become desensitized to the bad news on mortgage defaults and CDO write-downs, both of which are now considerably priced in. With the aid of central bank liquidity, and a fundamentally bullish outlook for world economic growth, contagion effects are likely to be contained to a mid-cycle correction in the stock market." The full CIBC World Markets StrategEcon report is available at: http://research.cibcwm.com/economic_public/download/saug07.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.