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.

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