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TSX target forecast lowered on U.S. stagflation concerns: CIBC World Markets

    Canadian energy, materials stocks will continue to drive index earnings

    TORONTO, July 7 /CNW/ - CIBC (CM: TSX; NYSE) - A slowing economy,
energy-driven inflation and higher interest rates will challenge "large swaths
of the stock market" through 2009, with the airline and auto sectors taking
the hardest hits, notes a new report from CIBC World Markets.
    Pointing to an "increasingly stagflationary" environment, particularly in
the U.S., CIBC World Markets Chief Economist and Chief Strategist Jeff Rubin
has lowered his year-end forecast for the TSX composite to 14,300 from 15,200.
 His 2009 target for the TSX has also been cut to 15,250 from 16,200.
    Rising interest rates in the U.S., coupled with the soaring cost of gas
and sliding house prices "will deal a lethal blow to the hopes for a fast
bounceback in growth stateside," says Mr. Rubin. "The U.S. economy will
continue to walk the fine line between growth and recession for a fair bit
longer. That will, in turn, take a toll north of the border."
    As a result, Mr. Rubin is reducing his "overweight" exposure to stocks in
his model portfolio by shifting four percentage points to cash.
Notwithstanding that reduction, favourable fundamentals make Canadian oil and
gas producers a continuing good investment. Mr. Rubin has added a further half
point of exposure to that sector.
    "The TSX energy index has climbed by nearly 20 per cent in 2008, even as
shares of the major global integrated players have stagnated or fallen," says
Mr. Rubin. Oil's "ride from US$100 to US$140 so far this year has produced a
cash bonanza for Canadian producers. In the last month alone, analysts have
tacked on a further five per cent to their previous 21 per cent expectation
for 2008 TSX earning growth, largely due to the sizzling energy profit
    Mr. Rubin has revised his oil price targets to an average of US$150 per
barrel of West Texas Intermediate crude in 2009 and US$200 in 2010. "Prices
could approach those levels sooner, if the present Gulf of Mexico hurricane
season hits exposed production heavily," says Mr. Rubin.
    He's also revised his natural gas target to US$15/MnBtu for next year, up
US$1. Gas-heavy junior producers have been among the strongest performers in
the TSX this year, says Mr. Rubin, adding that "natural gas demand globally
has been rising three times as fast as oil, and we expect that strength to
    The additional weighting in energy is funded in part by cuts to two
oil-sensitive groupings: the TSX consumer discretionary (11 per cent auto
related) and the industrials which includes the airline industry.
    "The auto component of consumer discretionaries looks particularly
vulnerable, in light of the fact that we are likely to see new vehicle sales
in the United States slump to as low as 11 million vehicles over the next two
years. We are also reducing our exposure to industrials, and in particular
airlines. Triple-digit oil prices portend soaring losses throughout the North
American, and indeed, world aviation industry," says Mr. Rubin.
    Mr. Rubin is also adding a half percentage point to his weighting in the
agricultural chemical sub-sector of the materials group. "Soaring demand for
higher protein diets in China and India is lifting agricultural prices around
the world and sending world fertilizer demand through the roof. The
ill-conceived diversion of America's corn crop to ethanol production is only
adding further fuel to already heated global fertilizer demand," says Mr.
    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)