TSX expected to return 18.5 per cent in 2007

    TORONTO, May 2 /CNW/ - CIBC (CM: TSX; NYSE) - With record private equity
activity feeding a booming M&A market and continued strength in global
resource prices, the TSX composite will hit a record 15,000 by year end, CIBC
World Markets' latest Canadian Portfolio Strategy Outlook report predicts.
    The 15,000 target will provide investors with a total return, including
dividend yield, of 18.5 per cent in 2007. This would mark the fourth
consecutive year that the TSX's total return would top that of the S&P 500. In
addition to helping fuel another year of strong earnings growth, the report
predicts that further M&A activity will also likely increase valuations for
firms on the TSX.
    "Premiums continue to hold up, with acquirers recently paying nearly
20 per cent above the market price, on average, to land their targets," says
Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets. "Such
activity has already had an appreciable impact on boosting performance in such
sectors as utilities, telecoms, gold and base metals."
    M&A activity in the TSX continues to run at a robust pace after setting a
record in the third quarter last year on a number of blockbuster deals in the
mining sector. Recent activity has focused on the telecommunications sector.
    Mr. Rubin notes that a new twist in the mergers and acquisitions game is
the rapidly expanding pace of private equity leveraged buyouts. Last year,
buyout funds put nearly US$11 billion into Canadian investments, more than
double the prior year's pace. That could easily be dwarfed by this year's
activity with a C$30 billion plus deal in the telecoms currently being played
out. Given the typical leverage, private equity funds have the capability to
take control of trillions in corporate assets.
    "The recent resurgence of the leveraged buyout (LBO) market after its
demise in the late 1980s has been driven by two factors-decade low interest
rates and very tame credit spreads on highly leveraged loans," notes Mr.
Rubin. "The initial LBO craze was driven by the innovation of the junk bond
market. Today's market relies partly on collateralized debt obligations (CDOs)
that enable banks to repackage and resell leveraged loans in an increasingly
liquid and competitive market."
    He adds that over the last six years spreads on ever more leveraged loans
have come in from 500 basis points off LIBOR to as tight as 230 basis points
given that the low rate of defaults has encouraged more and more investors to
pursue these highly attractive yields. As more investors get into this market,
financing terms will become even more attractive until such time that an
economic downturn inhibits debt servicing and leads to rising defaults.
    "The big winners from LBOs are, of course, those holding equities in
targeted companies-typically businesses whose stock market performance has
disappointed, but which have enough stability in cash flows to sustain a high
debt multiple," adds Mr. Rubin. "The big losers are bondholders lacking
sufficient covenants to prevent a piling on of additional debt, as witnessed
in Canada's telecom sector of late."
    As a result, CIBC World Markets is lowering its expected returns from the
bond market due to ongoing erosion in corporate spreads from the growing
threat of leveraged buyouts. Consequently, two percentage points of weighting
has been moved from bonds to stocks, raising its equity weighting to 68 per
cent, 12 percentage points above benchmark. Bonds now stand at 32 per cent
with zero in cash.
    Within its equity portfolio, CIBC World Markets is cutting its overweight
in financial stocks by two percentage points. A crumbling U.S. housing market
has yet to adversely impact consumer demand and a near-90-cent dollar has yet
to put the brakes on economic growth in Canada. This has made the prospect of
an easing of central bank rates in both countries more distant.
    CIBC World Markets is also moving a percentage point from financial
stocks to base metals stocks. Copper and nickel prices are near all-time
highs, while soaring metals prices are spurring widespread consolidation in
the global mining and metal processing industries. It has also moved a
percentage point of weighting from financials into the utilities sector in
anticipation that the sector may be the target of leveraged buyouts from firms
with stable cash flows.
    The Portfolio remains 3 1/2 points overweight energy stocks, in order to
capitalize on CIBC World Markets forecast of US$70-plus crude prices in the
second half of the year and new record prices for uranium as global demand for
nuclear power continues to benefit from rising world-wide concern about
greenhouse gas emissions.

    The complete CIBC World Markets report is available at:
    http://research.cibcwm.com/economic_public/download/psmay07.pdf.

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