Worst of the credit troubles in rearview mirror: CIBC World Markets
TSX should hit 15,000 by year-end, 16,200 in 2008 TORONTO, Oct. 4 /CNW/ - CIBC (CM: TSX; NYSE) - Stock markets are showing signs that the worst of the recent credit troubles have passed and a late rally should push the TSX to 15,000 by year-end, finds CIBC World Markets in its latest Canadian Portfolio Strategy Outlook report. "While some problems remain in the asset-backed commercial paper market, we are becoming more confident that the worst in credit markets may now be in the rearview mirror," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets. He notes that with liquidity improving, oil hitting record highs, a base metals rally and good prospects for further rate cuts south of the border, the TSX should not only hit 15,000 by year-end but close 2008 at the 16,200 level. The TSX has already recouped nearly three quarters of the summer's slide, with the previously hard-hit materials group up 20 per cent from a low in August. Given this, Mr. Rubin remains 12 percentage points overweight in equities and has also shifted two percentage points of weighting from cash back into the bank's still-underweight bond position. "Despite an initial reluctance, the U.S. Federal Reserve Board signalled clearly with September's aggressive 50 basis point cut that it now takes the threat of housing contagion seriously, and is ready to adjust policy accordingly," he adds. While Mr. Rubin notes that mortgage troubles in the U.S. will certainly dampen growth in the country over the next year, he does not think a full-blown U.S. recession is in the cards - in part because he expects the Fed will make further rate cuts. He also states that with its almost 50 per cent resource capitalization, the fortunes of the TSX are more intertwined with those of the global rather than the North American economy. It is the resource hungry emerging markets in Asia that are driving commodity prices and these economies have escaped serious damage from the U.S. credit crisis. This will keep positive pressure on resource demand and prices. West Texas Intermediate crude prices have already pierced the US$80/bbl mark, which is CIBC World Market's forecast for the fourth quarter, even with a comparatively uneventful hurricane season so far in 2007. The bank expects an average US$90 wellhead price in the coming year with global demand climbing by almost two per cent, nearly double its long-term trend. This growth will be driven not only by buoyant Chinese demand, but also rocketing consumption in oil exporters like Saudi Arabia, whose heavily subsidized motorists are using 10 per cent more fuel than a year ago. He also expects a rebound in natural gas prices from recent weather-depressed levels. Mr. Rubin argues that while the strong likelihood of royalty hikes in Alberta led to an almost immediate discount of Canadian oil stocks by domestic investors, it does not alter the fact that the Canadian oil sands represents over 50 per cent of the world's oil reserves open to private investment. As a result, he does not expect the royalty increases to deter large scale foreign acquisition of Canadian oil sands properties over the next 12-24 months. "Last month's bid by a Middle Eastern interest for a major energy producer suggests international investor interest in Canadian oil patch assets remains strong," says Mr. Rubin. "We remain four percentage points overweight the energy sector not only on the expectation of rising oil and gas prices but also for the M&A premiums they are likely to bring." CIBC World Markets has also added a half point of weighting to the gold component of the materials sector - moving it a full percentage point overweight. "Good prospects for further Federal Reserve Board rate cuts by year-end, and the steady drag of a U.S. current account deficit that measures over five per cent of GDP on the greenback, still leaves bullion prices a one-way bet. "We are raising our target for bullion to US$800 per ounce by the end of 2008. While valuations of gold stocks do not always keep pace with bullion price gains, potential consolidation in the industry should give gold stocks another lift." The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/psoct07.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.