TORONTO, March 5 /CNW/ - CIBC (CM: TSX; NYSE) - Solid global economic
fundamentals will see the TSX hit the 14,250 level by year end according to
CIBC World Market's latest Canadian Portfolio Strategy Outlook, despite
jitters triggered by a sell-off in the sizzling Chinese market.
    "The correction in the Shanghai Composite is nothing more or less than a
local adjustment to speculative froth, as evidenced by the preceding
140 per cent rise in Chinese valuations in the year prior to the one-day
nine per cent decline," says Jeff Rubin, Chief Strategist and Chief Economist
at CIBC World Markets. "Indeed global industrial production looks like it's
heading for another banner year of growth. That's bullish for a stock market
like the TSX, which is more levered to global growth than domestic growth."
    The report notes that the economic news from China, as from a number of
other places like Japan, UK, Italy and Germany has been decidedly better than
equity markets were counting on at the beginning of the year. The underlying
strength in overseas economic growth continues to lend support to commodity
markets.
    Oil prices, after plunging to a 20-month low earlier in the year, have
rallied back to over US$60 per barrel. More rapid than expected depletion in
conventional fields like Mexico's Cantarell, together with still-robust demand
growth outside of the OECD, should push crude prices above US$70 per barrel by
summer. CIBC World Markets expects gold, natural gas and uranium prices to all
climb in 2007.
    Mr. Rubin believes the short-term contagion effect on the TSX from the
sell-off provides investors who have been light in TSX exposure an excellent
opportunity to add to their stock position at discounted values. "Global stock
market contagion from the recent sell-off in the Chinese market opens up an
attractive buying opportunity for those wishing to add to TSX equity holdings.
Notwithstanding the market turbulence of the last several days, we believe
that solid overseas fundamentals support a 14,250 TSX level by year-end."
    Consequently, CIBC World Markets' recommended portfolio strategy remains
heavily overweight in stocks. The portfolio has stocks 10 percentage points
over benchmark at the expense of a reduced bond weighting and a zero cash
position. The portfolio remains tilted towards the cyclicals, with overweights
in both materials and energy, reflecting the TSX's closer correlation to
global growth than to Canadian growth. It also recommends an overweight
position in the fertilizer sector, which is soaring on American plans to
dramatically boost ethanol production to address concerns about green house
gases and global warming.
    On the interest rate front, Mr. Rubin believes a troubled U.S. housing
sector should ultimately subdue the consumer and prompt the U.S. Federal
Reserve Board to cut rates. "While there is little in our view to warrant
fears of a global slowdown, there are legitimate reasons to remain cautious
about the U.S. economy and in particular its problematic housing market," adds
Mr. Rubin.
    "An ongoing drop in home prices is a poignant reminder to markets that we
are still a long way from working out the adjustment in U.S. real estate.
While tight labour markets will keep the Federal Reserve Board on the
sidelines for the first half of the year, potential contagion effects from a
crumbling housing market will compel second-half rate cuts."
    Those cuts are likely to be matched in Canada, where a rebound in energy
prices would otherwise create some unwelcome strength for the Canadian dollar
and additional challenges for an already beleaguered manufacturing sector in
central Canada.
    The report notes that falling interest rates favour the financial sector,
and in particular REITs. REITs not only have a very high sensitivity to
falling bond yields but are also benefiting from tighter commercial property
markets and their exemption from recently announced tax changes to the rest of
the trust sector. As a result, CIBC World Markets has added a percentage point
to the sector this month.
    The CIBC World Markets Canadian Portfolio Strategy Outlook report is
available at http://research.cibcwm.com/economic_public/download/psmar07.pdf.

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