CIBC World Markets lowers TSX, oil targets on weaker global growth and selling pressure
TORONTO, Sept. 10 /CNW/ - CIBC (CM: TSX; NYSE) - The world economy may be slowing but should perform above levels that sparked earlier commodity recessions, notes a new CIBC World Markets report. "With Europe in recession and Japan and the U.S. economy in borderline status, world growth outlook is the weakest in years. But it is still nowhere near as weak as plunging resource stocks would suggest," notes Jeff Rubin, CIBC World Markets chief economist and chief strategist, in his latest Canadian Portfolio Strategy Outlook Report. "Our own forecast for 3.7 per cent global GDP growth this year and 3.9 per cent next still implies a stronger performance than the 2-2.5 per cent increases that sparked the last two protracted commodity recessions in 1998 and 2001," says Mr. Rubin. "As was the case in the 2001 recession, China has hardly noticed the U.S. downturn, and we shouldn't expect other emerging giants like Russia, India and Brazil to notice that much either." But dimming global growth prospects and selling pressure on the markets are significant enough that Mr. Rubin is taking a more cautious stance with his model investment portfolio. He has lowered his year-end target for the TSX composite index to 13,000 from 14,300, and is cutting his 2009 target to 14,000 from 15,250. "Our targets imply a slightly negative annual total return from the TSX this year but a more typical return next year." Mr. Rubin remains "index-weight" on overall equity market exposure, but is trimming his "overweight" position in energy stocks by 2.5 percentage points. That move "acknowledges that oil prices are likely to lag our earlier targets in the next year or two" in light of weaker global growth. "Most of the recent decline in oil prices should be reversed over the next six months, but we are reducing our 2009 target for crude to US$130 per barrel average from US$150." This year's oil target has also been lowered to an average US$115 per barrel this year from US$125. Mr. Rubin has also cut his target for natural gas to an average US$9/Mn Btu this year and $10 in 2009 from US$11 and US$13 respectively. The new target reflects an eight per cent increase in U.S. domestic production. The weighting cut in energy is being moved to financials, which brings Mr. Rubin's portfolio to full market weight in that sector. "The global financial system still faces considerable headwinds, but gradually some of the worst fears are being overcome. The (U.S.) Treasury's confidence-boosting steps to shore up Freddie and Fannie sooner rather than later will help Canadian players with U.S. mortgage assets. Third-quarter results from Canadian banks were also generally encouraging enough to allow them to make subsequent headway in raising much needed long-term debt and preferred share capital," says Mr. Rubin. The likelihood that inflation in the U.S. will be a greater problem than generally believed will likely force the U.S. Federal Reserve to be more hawkish than other central banks in the coming months, says Mr. Rubin. "That creates appreciable risks for fixed income markets." As a result, the model portfolio maintains two points "underweight" in bonds with an offsetting cash "overweight" stance. A month ago Mr. Rubin shifted to a neutral stance on base metals, citing risks to those stocks in a softer global economy. By contrast he remains "overweight" potash and fertilizer products. "Food is an essential commodity regardless of growth prospects. Valuations appear to discount a potash price well below current levels in the wake of the recent correction," he says. Mr. Rubin adds that gold producers, along with bullion, should also benefit from a partial unwinding of the greenback's recent overdone strength. Consequently, he remains "overweight" in that sector as well. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/pssep08.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.