Global economy still growing at better than 3.5 per cent

    TORONTO, Oct. 9 /CNW/ - CIBC (CM: TSX; NYSE) - Investor panic over the
global financial crisis could send the TSX to 9,500 this year, but market
fundamentals don't justify the sell-off and will likely spur a major rebound
in 2009, notes a CIBC World Markets report.
    "It almost seems that the more the Federal Reserve Board and other
central banks around the world pull new tricks out of their hats, the more
investors run for cover," says Jeff Rubin, CIBC World Markets chief economist
and chief strategist, in his latest Canadian Portfolio Strategy Outlook
Report.
    He adds that in a world where there are suddenly no benchmarks for
policies or valuations, it's hard to get an accurate compass reading of where
markets are at. However, "investors should not lose sight of the fact that
many of yesterday's fundamentals have not changed.
    "While there is now little doubt that most OECD economies are in
recession, there is little to suggest that growth has come anywhere close to
grinding to a halt in any of the BRIC countries (Brazil, Russia, India, and
China), that have been the mainstay of recent global economic growth," notes
Mr. Rubin.
    He adds that recessionary conditions among the world's richest countries
is still "neither deep enough nor global enough to warrant the massive
hair-cut in energy and other resource stock valuations that have taken place
over the last several months.
    "If US$90 a barrel is the price of oil during what is being perceived as
a deep global recession, what is the price of oil in the recovery? Where is
oil trading four quarters from now when the U.S. and European economies are no
longer contracting? At least back to where they were before the recession, and
maybe higher, given that the recent plunge in crude prices will cancel some
new supply between now and then," says Mr. Rubin.
    He forecasts oil prices will average US$150 a barrel over the second half
of next year on even a modest recovery in global economic growth.
    He also contends that what's true for energy is broadly true for many
other commodities. "Juxtaposed against the five per cent-plus growth rates
still coming out of Russia, China, Brazil, and the Middle Eastern OPEC states,
it's difficult to see global growth collapsing as the plunge in resource
stocks would otherwise seem to suggest," says Mr. Rubin.
    Global growth is unlikely to fall below 3.5 per cent this year or next,
Mr. Rubin adds. "While that's a big step down from the growth of the last
several years, it is still a far cry from the growth rates that historically
have been associated with a sustained bear market in global commodities. And
for that matter, commodity prices have yet to fall anywhere close to levels
that in the past have been associated with bear markets.
    However, lack of benchmarks for investors means stocks remain vulnerable
due to continued concerns about financial markets over the next quarter. "This
is likely to continue until a bottom in U.S. housing prices in the first half
of the coming year." As a result, he expects an energy-led rebound to take the
TSX back to 12,000 by the end of 2009.
    "A year-end target of 12,000 represents an almost 30 per cent upside for
stocks over the course of 2009. That's sufficiently attractive to warrant a
market weight in equities, despite the prospect of near-term volatility in the
index in coming months," says Mr. Rubin.
    He's taking a near-term defensive posture in his model portfolio,
reflected in extra weighting to consumer staples and utilities. "Those sectors
have outperformed the market 80-90 per cent of the time in recessions. Over a
full year, energy and in particular oil stocks, provides the largest upside
for investors, warranting a continuing overweight."
    The complete CIBC World Markets report is available at:
    http://research.cibcwm.com/economic_public/download/psoct08.pdf

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