TSX a good investment bet despite stumbling U.S. economy: CIBC World Markets
Investors need to resist urge to duck for cover TORONTO, Jan. 8 /CNW/ - CIBC (CM: TSX; NYSE) - Despite investor concerns over the impacts of a visibly stumbling U.S. economy, the TSX remains a good investment bet, finds CIBC World Markets latest Canadian Portfolio Strategy Outlook report. The report notes that while the U.S. is clearly struggling under the weight of the mortgage crisis, strong fundamentals remain in the Canadian market and investors need to resist the temptation to duck for cover. "We remain fundamentally bullish on the resource- and energy-laden TSX," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets. "The advent of US$100 per barrel oil justifies our large overweight in energy stocks, which in the current price environment will soon be attracting considerable M&A activity. "Recent merger and acquisition premiums in the global energy market have been running at a 30-40 per cent, and we see no reason why acquisitions of Canadian energy assets, particularly oil sands properties, won't go for as much or more. Overweights in the base metals and gold sectors reflect our optimism on world economic growth, driven by strong overseas economies, and our pessimism on the U.S. dollar." He remains four points overweight in energy stocks and two points overweight in materials. CIBC World Markets forecasts the market rally will continue through 2008 with the TSX composite hitting 16,200 by year end, a total return approaching 20 per cent. "This rally has none of the excesses that characterized the doomed tech bull market of the late 1990s," adds Mr. Rubin. "Dividend yields, for example, have held steady at roughly 21/2 per cent, as growing earnings enabled payouts to climb on pace with stock prices. While that doesn't sound particularly lofty, the gap to cash and bond yields has been narrowing, and will be further trimmed by a quarter point Bank of Canada cut which seems likely for January. "Moreover, dividend yields on the TSX are about a half point higher than on the S&P 500. Earnings gains should leave room for solid dividend growth in 2008. Some of the most generous dividend plays lie in banks, a sector we remain underweight given concerns, likely already overdone, about credit exposures. But the highest dividend yield, currently at just under four per cent, well above bond yields on a tax-adjusted basis, is in utilities, a sector that also has attraction as a defensive play. We're adding a one percentage-point overweight to that sector as a result." Mr. Rubin also notes that earnings momentum remains impressive, with last year's 12 per cent climb in operating bottom lines more than keeping pace with stock prices. He notes a 13 per cent profit gain in 2008 will be supported by rising oil, natural gas and gold prices, renewed strength in base metals and healthy Canadian retail sales. On that basis, the composite currently sits at a reasonable 14.5-times forward earnings, a multiple that is increasingly attractive in a period of declining interest rates. While the resource and energy sectors remain strong, the current struggles in the U.S. economy will adversely affect financial and industrial stocks as well as in the auto parts-related segment of consumer discretionaries in the near term. "Mark-to-market prices in assets related to still-rising default rates on U.S. subprime mortgages remain problematic for Canadian bank valuations," adds Mr. Rubin. "At the same time, export-oriented Canadian manufacturing stocks remain exposed not only to a parity exchange rate but to a weak first- half U.S. economy." Accordingly, he has cut a percentage point from the consumer discretionary sector and remains underweight on financials and industrials. With the outlook for the American economy remaining gloomy through at least the next quarter, Mr. Rubin expects to see another half point rate cut from the U.S. Federal Reserve Board - with the Bank of Canada following with its own quarter point cut. He also expects that the Bush administration's efforts to freeze some mortgage rates and accelerate re-financings into government guaranteed loans, will keep a substantial share of sub-prime mortgages from defaulting. As a result of these interest rate initiatives he has moved a percentage point from cash to bonds. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/psjan08.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.