TSX sell-off an over reaction: CIBC World Markets
Global economy still growing at better than 3.5 per cent TORONTO, Oct. 9 /CNW/ - CIBC (CM: TSX; NYSE) - Investor panic over the global financial crisis could send the TSX to 9,500 this year, but market fundamentals don't justify the sell-off and will likely spur a major rebound in 2009, notes a CIBC World Markets report. "It almost seems that the more the Federal Reserve Board and other central banks around the world pull new tricks out of their hats, the more investors run for cover," says Jeff Rubin, CIBC World Markets chief economist and chief strategist, in his latest Canadian Portfolio Strategy Outlook Report. He adds that in a world where there are suddenly no benchmarks for policies or valuations, it's hard to get an accurate compass reading of where markets are at. However, "investors should not lose sight of the fact that many of yesterday's fundamentals have not changed. "While there is now little doubt that most OECD economies are in recession, there is little to suggest that growth has come anywhere close to grinding to a halt in any of the BRIC countries (Brazil, Russia, India, and China), that have been the mainstay of recent global economic growth," notes Mr. Rubin. He adds that recessionary conditions among the world's richest countries is still "neither deep enough nor global enough to warrant the massive hair-cut in energy and other resource stock valuations that have taken place over the last several months. "If US$90 a barrel is the price of oil during what is being perceived as a deep global recession, what is the price of oil in the recovery? Where is oil trading four quarters from now when the U.S. and European economies are no longer contracting? At least back to where they were before the recession, and maybe higher, given that the recent plunge in crude prices will cancel some new supply between now and then," says Mr. Rubin. He forecasts oil prices will average US$150 a barrel over the second half of next year on even a modest recovery in global economic growth. He also contends that what's true for energy is broadly true for many other commodities. "Juxtaposed against the five per cent-plus growth rates still coming out of Russia, China, Brazil, and the Middle Eastern OPEC states, it's difficult to see global growth collapsing as the plunge in resource stocks would otherwise seem to suggest," says Mr. Rubin. Global growth is unlikely to fall below 3.5 per cent this year or next, Mr. Rubin adds. "While that's a big step down from the growth of the last several years, it is still a far cry from the growth rates that historically have been associated with a sustained bear market in global commodities. And for that matter, commodity prices have yet to fall anywhere close to levels that in the past have been associated with bear markets. However, lack of benchmarks for investors means stocks remain vulnerable due to continued concerns about financial markets over the next quarter. "This is likely to continue until a bottom in U.S. housing prices in the first half of the coming year." As a result, he expects an energy-led rebound to take the TSX back to 12,000 by the end of 2009. "A year-end target of 12,000 represents an almost 30 per cent upside for stocks over the course of 2009. That's sufficiently attractive to warrant a market weight in equities, despite the prospect of near-term volatility in the index in coming months," says Mr. Rubin. He's taking a near-term defensive posture in his model portfolio, reflected in extra weighting to consumer staples and utilities. "Those sectors have outperformed the market 80-90 per cent of the time in recessions. Over a full year, energy and in particular oil stocks, provides the largest upside for investors, warranting a continuing overweight." The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/psoct08.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.