TSX Expected to Outperform S&P 500

    TORONTO, April 3 /CNW/ - CIBC (CM: TSX; NYSE) - Rising global energy and
base metal prices will outweigh impacts from the woes in the U.S. housing and
subprime mortgage market and drive the TSX to outperform the S&P 500 this
year, finds CIBC World Markets' latest Canadian Portfolio Strategy Outlook
report.
    "While we expect to see further distress in both the U.S. housing market
and the subprime mortgage market, there is little if any evidence of broad
contagion effects in financial markets," says Jeff Rubin, Chief Strategist and
Chief Economist at CIBC World Markets. "Corporate spreads remain tight by any
historic benchmark while option volatility on the S&P 500 is only a fraction
of that seen during last year's panic attack over the U.S. Federal Reserve's
tightening."
    The report notes that the TSX, given its resource and energy base, is far
more impacted by global growth than it is by either Canadian or North American
economic performance. Recent increases in both energy and base metal prices
have brightened the outlook for the TSX.
    "Together with soaring uranium prices and firming natural gas prices, the
return of US$70 per barrel oil will catapult the TSX energy sector to new
highs," notes Mr. Rubin. "Buoyed by its reliance on global resources and with
less exposure to the sub-prime mortgage market, we expect the TSX to
outperform the S&P 500 this year."
    While the TSX is far from immune from any fallout from the subprime
mortgage market, the S&P 500 is far more directly exposed, finds the report.
It notes that the Canadian financial services industry is far less exposed to
the subprime mortgage market than its U.S. counterparts. The subprime market
represents less than five per cent of new mortgages in Canada but over 20 per
cent in the U.S.
    Moreover, consumer stocks are similarly more at risk in the U.S. than in
Canada from any collateral damage from the housing market. While the report
notes that there could still be cross-border spillover effects on the Canadian
consumer, such stocks including the domestically oriented media group, account
for only 8 per cent of the TSX market cap compared to 20 per cent of the S&P
500. CIBC World Markets also expects that the U.S. Fed will be prepared to cut
interest rates to contain any contagion effects outside of the housing
industry, particularly to offset any impact on consumer spending.
    Mr. Rubin believes that the subprime mortgage shock is "unlikely to come
even close to the Savings and Loan crisis of the late 1980s or the dot.com
bubble collapse. Our projections assume that soaring delinquencies on subprime
mortgages will eventually lead to a 30 per cent default rate. We have assumed
only a subsequent 50 per cent recovery rate on defaulted loans, allowing for
continuing declines in property prices. Even so, losses are unlikely to come
in above $100 billion."
    The Savings and Loan crisis saw losses of $270 billion, with the losses
in the Dot-Com collapse reaching $5 trillion, both in today's dollars.
    The report notes that the TSX has already recuperated much of the ground
lost in February's angst over China and initial fears about the U.S. sub-prime
mortgage market. The U.S. Federal Reserve's shift back to a neutral bias at
its March meeting was enough to lift the TSX Composite back to within striking
range of its early 2007 peak. Mr. Rubin expects the TSX will exceed that in
the next quarter. He remains 10 percentage-points overweight equities in his
portfolio, and believes his TSX year-end target of 14,250 should yield a total
return of nearly 13 per cent.
    Mr. Rubin remains 3.5 percentage points overweight in energy. He cites
that rising tensions with Iran, the upcoming Nigerian elections, and early
weather warnings of a more active hurricane season in the Gulf of Mexico this
year, should see crude prices rise steadily to top US$75 per barrel by the
fourth quarter of this year.
    He expects base metal stocks to set new highs this year on the back of
strengthening copper and nickel prices while gold shares look undervalued
relative to bullish prospects for bullion. CIBC World Markets also remains
overweight financial institutions and particularly banks. The report notes
that Canadian banks continue to outpace their U.S. counterparts and are well
positioned to benefit from any second-half cuts in North American interest
rates.
    The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/psapr07.pdf.

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