But recovery hopes rest on credible fiscal stimulus packages

    TORONTO, Jan. 9 /CNW/ - CIBC (CM: TSX; NYSE) - The worst period in
generations for Canadian equity returns may already be over if credible fiscal
stimulus packages are launched in North America in the coming weeks, notes a
new report from CIBC World Markets.
    "The bad news is that we are in a recession, and a fairly deep one at
that. The good news is that the stock market has already discounted a
depression," says Jeff Rubin, CIBC World Markets chief economist and chief
strategist, in his latest Canadian Portfolio Strategy Outlook Report. "That's
why no matter how severe the recent non-farm payroll losses are" or how dismal
the manufacturing index numbers get, "the stock market soon shrugs it off."
    But hope for a lasting rally and recovery from the current crisis "is
centred on meeting an unprecedented financial shock with an equally
unprecedented dose of monetary and fiscal stimulus," the report states.
    "Stocks can only cheer as businesses and households will be force-fed
stimulus money from governments that will no longer care about deficits," says
Mr. Rubin. He adds that with deep interest rate cuts and fiscal stimulus
efforts underway in most of the world's major economies, global growth is
likely to return by the second half of 2009, spurring on the TSX composite
index. "With the market having set the bar so low insofar as the economy is
concerned, the slightest pulse in second-half growth should send the TSX
climbing to 11,000 by year-end."
    Mr. Rubin expects some progress toward that target in the next two
quarters, but the majority of the climb will come after a mid-year economic
upturn. For that reason, he remains "market weight" on equities in his model
portfolio.
    For now, given the uncertain timing of an economic recovery, Mr. Rubin's
recommended portfolio weights continue to steer away from the sectors most
exposed to downside economic risks, with "overweights" in some of the
traditional safe havens like utilities and consumer staples.
    "Consumers remain under pressure to slash non-essential spending in most
countries, including the U.S. and Canada. President-elect Obama's targeted tax
relief could help, but excepting funds flowing to the lowest income groups,
there's the risk that some of the cash will simply be tucked away in savings,"
he says. "While Canadian wealth losses have been milder thus far, housing
values are still in retreat, and consumers will be cautious on big-ticket
spending." As a result, Mr. Rubin is recommending heavy "underweights" in
equities tied to consumer discretionary spending and autos.
    This month, Mr. Rubin has made two slight weighting changes to his model.
Firstly, as a result of more realistic valuations in the technology sector, he
no longer suggests as heavy an "underweight" stance and has added a percentage
point of exposure.
    That move was funded by a single point reduction in his already
underweight position in industrials. "Rails, which make up half of that
sector's weight, face sliding freight volumes as the recession bites, although
transit equipment and engineering firms could benefit from increased
infrastructure outlays."
    Meanwhile, for commodities, the report notes that non-precious metals and
lumber are still mired in recessionary conditions, and base metals will post
much lower average prices in 2009.
    "But we continue to favour gold as a hedge against an eventual return of
both inflation and U.S. dollar depreciation. In the here and now, CPI is still
melting away as the year-on-year pace to energy inflation turns sharply
negative. But the (U.S. Federal Reserve) is determined to reflate, as
indicated by the unprecedented pace to money supply growth," the report
states.
    As for oil, the seeds are being laid for a sharp rebound in crude prices
during the next global recovery with a taste of that to come in late 2009.
    "If $40-50 per barrel is the price of oil in a deep global recession, it
shouldn't be too hard to figure out why our portfolio is four points
overweight energy stocks," says Mr. Rubin. "World demand may be falling now,
but it will be world supply that will be falling later. Recession prices have
already cancelled or delayed one million barrels per day of planned oil sands
production in Canada, and countless other barrels of production in other
high-cost locations around the world. It won't be very far down the road of an
economic recovery before we encounter triple-digit oil prices again. And when
we do, our overweight in oil stocks will be there to reap the rewards."

    The complete CIBC World Markets report is available at:
    http://research.cibcwm.com/economic_public/download/psjan09.pdf

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