Strong global economy to eclipse US troubles, spurring TSX recovery: CIBC World Markets
TORONTO, Nov. 8 /CNW/ - CIBC (CM: TSX; NYSE) - Troubles emanating from the US housing market will prove no match for the global forces driving the TSX's recovery, notes a new CIBC World Markets report. October's "rebound in the TSX was aided by record oil prices and a turnaround in uranium stocks" reflecting global growth that is "as firm as ever", says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets in his monthly Canadian Portfolio Strategy Outlook report. "We expect to see continued market leadership from the energy and materials sectors which together comprise almost half of the TSX's total market capitalization," he says. This should "more than offset the drag from the current spillover effects from the U.S. subprime mortgage market on Canadian bank stocks." As a result, Mr. Rubin is reiterating his call for the TSX to reach 16,200 by December 2008, and is sticking to a 12 percentage-point overweight position in equities. "The TSX is much more a play on the global economy" than US economic growth, says Rubin, pointing to its weighting in energy and materials that have tripled since the start of the decade to 45% of market capitalization. That compositional change in market cap, driven in part by soaring resource prices, "couldn't come at a more propitious time, as the US economy has gone on recession watch while the global economy has seldom been stronger," says Rubin. "Outside of the US economy, growth is soaring. Recent estimates from the IMF now point to near-5% growth in real global GDP next year." Mr. Rubin has raised his short-term forecast on the loonie, which he expects will reach a record high of US$1.11 by year end, as the stimulus from planned tax cuts and strong resource prices preclude a loonie-cooling interest rate cut. However, he expects the Canadian dollar will settle back to a 5-cent premium over the greenback in 2008. The prospect of an even stronger loonie has prompted Mr. Rubin to cut half a percentage point in his portfolio's underweight position in industrial stocks, which are highly exposed to the currency. Mr. Rubin is allocating a half percentage point to his portfolio's overweight position in gold stocks. He's also adjusting his gold price target, which he expects will reach US$900 in late 2008. The move is predicated on an expected rate cut by the Federal Reserve Board that will further weaken the U.S. dollar, and "exploding wealth" in the Middle East and India where "there is strong predilection for owning (gold)." Mr. Rubin adds that "with global (gold) M&A volumes running at quintuple the level three years ago, when prices began their recent strong rally, an appetite for producing properties should help to make gold mining shares a good investment." Within the energy sector, Mr. Rubin is maintaining an overweight position as Alberta's new royalty framework is less onerous than feared and "modest by international standards." "Most importantly to our overweight position, we expect that a strong global M&A market for oil and gas assets will soon begin to make a major impact on Canadian oil sands valuations. The takeover premium in global oil and gas deals has averaged nearly 30% in the last twelve months, nearly double the premium in the supposedly hot internet/computer sector. As Canadian oil sands continue to grow in global strategic importance, investors can expect increased takeover activity in the sector at current, if not greater, premium than already seen." Within the financial sector, Mr. Rubin is moving to a one-percentage-point underweight in bank stocks, and adding that weight to non-bank financials which represent a better bet against further write downs associated with the still-imploding US subprime mortgage market. "We are already overweight non-bank financials in light of insurers' increasing participation in emerging markets overseas," adds Mr. Rubin. Mr. Rubin expects that the two-month rally for bonds will continue in the near term, but is standing pat on a nine-percentage-point underweighting. "While we would normally add weight to our bond position with a further Fed cut still ahead of us, we have chosen not to" as bond markets will be contending with "some of the hottest U.S. inflation numbers in years thanks to soaring energy and food prices". As a result, he expects that U.S. headline inflation will reach close to four percent over the next 12 months. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/psnov07.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.