But building blocks for sustained recovery still not firmly in place

    TORONTO, Nov. 11 /CNW/ - CIBC (CM: TSX; NYSE) - There are encouraging
signs that equity markets are nearing a bottom and that the final days of 2008
will pass without another meltdown, notes a new report from CIBC World
Markets.
    "We are cautiously optimistic that we can ride out the balance of the
year without any further systemic shocks," says Jeff Rubin, CIBC World Markets
chief economist and chief strategist, in his latest Canadian Portfolio
Strategy Outlook Report.
    The sources of Mr. Rubin's optimism include the London interbank offered
rate or Libor, the interest rate at which banks lend money to each other.
Libor has been reversing from summer-end highs in response to central banks
aggressively cutting interest rates and infusing billions of dollars in cash
and guarantees. The result is that "interbank lending is once again showing
encouraging signs of life" after recording no growth during the spring and
summer, says Mr. Rubin.
    Equally significant is China's new fiscal stimulus package which "could
add as much as three per cent to that country's growth over the next two
years," notes Mr. Rubin, adding that the "U.S. is about to follow suit" with
another stimulus plan.
    But while "there may now be a few more signs of easing financial strains
to the discerning eye, the building blocks for a sustained equity rally are
still not firmly in place," warns Mr. Rubin. "With credit and liquidity fears
abating somewhat, concern is rapidly shifting to one of the other key factors
clouding prospects for a heavily resource weighted TSX, the troubled global
economy.
    "The jury may still be out on the extent of the downshift in growth in
emerging markets like China. But there is little doubt in the wake of Q3's GDP
decline and bleak manufacturing and employment data that the U.S. has now
joined the Eurozone, Japan and most other OECD economies in outright
recession."
    But if equity markets have seen, or are near a bottom, history provides
clues on how long it might take stocks to fully recover, notes Mr. Rubin.
"Unfortunately, only once in the TSX's nine peak-to-trough declines of more
than 20% since 1956, did it take less than two years for the market to retest
its previous peak. On average, it has taken the TSX about three years to fully
recover from a bear market. But the 1973 and 2000 bear markets took at least
three times as long to incur roughly the same magnitude of losses as those
seen recently. That provides some hope that the coming recovery period could
be shorter than average.
    "Even so, our 12,000 end-of-2009 forecast for the TSX implies that the
market will remain well below its recent highs, until sentiment towards the
U.S. and other key economies improves. Our shorter term target of 9,500 for
the end of the current year means, moreover, that the market could struggle to
maintain its current level through year-end," says Mr. Rubin.
    As a result, he's maintaining "market weight" exposure to Canadian
equities in his model investment portfolio.
    Meanwhile, Mr. Rubin has made two single point shifts in his portfolio.
Firstly, he has moved one percentage point of weighting to cash from bonds.
"Government bonds appear to have exhausted their room to rally," notes Mr.
Rubin. "In the wake of huge central bank rate cuts real interest rates are
hugely negative at the short end of the curve. Fiscal stimulus will put
pressure on the supply of government debt, if more so in the U.S. than
Canada."
    Secondly, within his equity mix, he has added one point of weighting to
the defensive consumer staples group. "This sector, dominated by
pharmaceutical and food retailers, has been the TSX's strongest sector in
2008." The increase is funded by an equal cut from the energy group,
specifically natural gas stocks which Mr. Rubin says face "burgeoning
non-conventional supply" that could drive prices to an average of US$7.50/Mn
Btu next year.
    Despite the cut to natural gas stocks, Mr. Rubin remains four points
"overweight" in the energy sector. "Oil is still the best play on recovery,
when temporary market fears of demand destruction should quickly morph into
more lasting fears of supply destruction.
    "With the marginal cost of new oil sands projects over $90 per barrel,
the recent plunge in oil prices has already trimmed $30 billion from Canadian
project investment - ditto for the investments in the Brazilian offshore, Gulf
deepwater, and many other sources of tomorrow's expected supply. Investors are
likely to find that oil demand can be turned back on a lot easier than
bringing back supply," says Mr. Rubin.
    The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/psnov08.pdf

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