Skip to Content
News Releases
U.S. recession fears overblown: CIBC World Markets

    TSX likely to hit new highs by end of '08

    TORONTO, Dec. 11 /CNW/ - CIBC (CM: TSX; NYSE) - The U.S. economy will "re-
accelerate" in 2008 leading North American stocks to new highs if the Federal
Reserve Board makes additional rate cuts as expected, notes a new CIBC World
Markets report.
    "U.S. Main Street is fundamentally a lot healthier than Wall Street would
have you believe," says Jeff Rubin, Chief Strategist and Chief Economist at
CIBC World Markets in his monthly Canadian Portfolio Strategy Outlook report.
"A two-quarter slowdown, contained by more Fed rate cuts, should set the
stage" for increasing economic growth and a continuation of the five-year bull
run on North American stock markets, especially the resource and energy rich
    Yet until the soft patch is over, Mr. Rubin is moving to a more
"defensive portfolio posture." He's cutting the bank's "overweight" position
in equities by three percentage points, and putting those funds into bonds.
That strategy is aimed at riding out near-term turbulence caused by "nervous
investors responding to uncertain conditions in credit markets" and the
subprime mortgage crisis, says Rubin. "The Government of Canada curve is
likely to provide a yield-producing refuge from the storm."
    Mr. Rubin is also reducing the bank's weighting in financial stocks by a
percentage point given the US$400 billion in subprime U.S. mortgages that are
due for interest rate resets in 2008. Even with plans to freeze some rates,
the refinancing troubles that will follow will likely intensify market
jitters. However, Mr. Rubin expects investor fears will "fade away" after the
reset schedule reaches its peak around mid year.
    Financial stocks "continue to be the critical nexus between the U.S.
subprime mortgage market and the TSX's broad performance," says Mr. Rubin. But
since banks are fundamentally attractive businesses, he regards the weighting
cuts as "tactical as opposed to strategic," and hopes to reverse them sometime
next year.
    Offsetting the reduction in financials, Mr. Rubin is moving to a modest
"overweight" position in consumer staples, a segment dominated by major drug
retailers. "With yearly employment growing at over twice the U.S. pace, and
rising rather than falling home wealth, Canada's households are looking better
armed financially these days than their peers stateside, warranting a
heightened exposure to consumer stocks."
    Mr. Rubin is paring back his "overweight" stance in materials by one
percentage point due to recurring cost overruns and project delays in both the
gold and base metals sectors. He's also maintaining his gold price target of
US$900 over the next year, citing expectations of lower U.S. interest rates, a
weak greenback, and strong overseas demand for the metal.
    Mr. Rubin remains "overweight" in energy. "The red hot performance of
China's economy will help to keep demand growth on the boil there," he says.
Also, "heavy investments in power generation, water desalinization and the
petrochemical sector along with subsidized prices mean the Middle East is
likely to lag only China as a source of incremental oil demand in coming
years. That, in turn, will eat into the regions exportable surpluses, limiting
the ability to meet rising needs elsewhere." He also expects that natural gas
prices will continue their recovery as bloated U.S. storage inventories begin
to decline.
    Also unchanged is Mr. Rubin's "underweight" position in the telecom
sector which reflects drop-offs in private equity flows and efforts by Ottawa
to spur competition in the wireless sector that could hurt the comfortable
margins of established service providers.
    Despite the TSX taking longer than expected to recoup recent losses, he's
maintaining a bullish forecast for the year ahead. "We continue to expect
stocks to outperform other asset classes over a twelve month horizon. Our year-
end target for 2008, of 16,200 for the Composite, implies a year of double-
digit gains, including the dividend. Consensus expectations for 2007 and 2008
earnings growth have been cut by about 1.3 and 0.8 per cent-pts respectively
in the last month. The expected increases of 11 per cent and 13 per cent are
still, however, well above the average 8 per cent growth rate of the last 25
years, with a 15 per cent gain likely in the current quarter.
    The complete CIBC World Markets report is available at:

    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.

For further information:
For further information: Jeff Rubin, Chief Economist and Chief
Strategist, Managing Director, CIBC World Markets at (416) 594-7357, or Tom Wallis, Communications and Public Affairs at
(416) 980-4048,