Tread cautiously in equity markets this spring: CIBC World Markets
But expect energy, materials to spur late year turnaround for TSX TORONTO, Feb. 5 /CNW/ - CIBC (CM: TSX; NYSE) - North American stock markets face further declines this spring with the prospect of significant writedowns by North American banks and weakness in the U.S. economy, notes a new CIBC World Markets report. "The tandem of falling (U.S.) housing prices and rising default rates should trigger as much as another US$30-50 billion in asset writedowns by North American banks over the next quarter, which, together with a visibly struggling U.S. economy could be a catalyst for another five percent correction," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets in his monthly Canadian Portfolio Strategy Outlook report. "Already at US$140 billion, world-wide writedowns on U.S. subprime mortgage assets are likely to peak in the US$265 billion range over the next year," says Mr. Rubin, adding that those losses are likely to occur in spite of both Fed easing and efforts by Washington to spare over 300,000 mortgage holders from painful mortgage resets. "As long as falling (U.S.) house prices continue to generate significant negative home equity among subprime mortgage holders, default rates will continue to rise even if subprime mortgage rates do not," says Mr. Rubin. "A double-digit decline in housing prices will bring a concomitant increase in default rates which will likely approach just under 30 percent by the fourth quarter." Yet despite the near-term bumpiness, Mr. Rubin remains bullish on the year. "While interest rate cuts and fiscal stimulus will not salvage U.S. housing prices or prevent subprime mortgage default rates from rising, they should go a long way in containing broad contagion effects to the rest of the economy," he says, adding that "a 2.5 percent federal funds rate should resuscitate the U.S. economy and North American equity markets by the second half of the year." Mr. Rubin also points to continuing strength in overseas economies and the prospect of triple-digit oil prices over the next twelve months which "should set the stage for a powerful second-half rally in the market that will see the TSX end the year at 14,500." These conditions should also see the energy and resource laden TSX hitting 16,200 by the end of 2009, he says. To guard against interim volatility, Mr. Rubin is cutting the weighting of stocks in his model portfolio by nine percentage points, and putting that money into bonds. "We would expect to be adding weight back to our equity position over the latter half of the year" as markets move closer to his targets, says Mr. Rubin. By sector, Mr. Rubin remains "overweight" in energy, gold and base metal stocks which he says have been undervalued by subprime jitters. "We continue to like the energy and commodity side of the market which is largely detached from the problems of the US housing market and even the more general outlook for the US economy," he says. Meanwhile, Mr. Rubin is raising his target for bullion prices to US$1,000 per ounce this year and is reaffirming his "overweight" stance in this sector. He's also forecasting that base metal prices, while not keeping pace with gold prices, "should remain at historically high levels despite the performance of the US economy, reflecting robust economic growth not only in China but in other resource-intensive developing economies like India and Brazil." Mr. Rubin is also reducing his weighting in banks and telecoms by a further half-percentage point each, and moving those funds into utilities. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/psfeb08.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.
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, firstname.lastname@example.org