TSX likely to fall to 7,000 before it rebounds on massive U.S. stimulus package: CIBC World Markets
Economic woes will hold TSX to a high of 9,000 in 2009 TORONTO, March 11 /CNW/ - CIBC (CM: TSX; NYSE) - A rapidly deteriorating economic outlook for North America and much of the OECD will likely push the TSX down to 7,000 before the massive U.S. fiscal stimulus and financial rescue package kicks in, finds a new report from CIBC World Markets. As a result, the bank has slashed its targets for both 2009 and 2010. The report notes that second-quarter GDP in both the U.S. and Canada is to likely to show further substantial contractions in the economy, while the banking crisis in the U.S. is likely to continue to have spillover effects on Canadian financial stock valuations. "Even with a second-half economic recovery, it is hard to see the TSX beyond 9,000 at year-end," says Jeff Rubin, CIBC World Markets chief economist and chief strategist. "Assuming a sustained recovery in 2010, we could see the index rise to 11,000 by the end of next year. But even so, that will still leave Canadian equity valuations almost 30 per cent below their mid-2008 peak-a bleak testament to how much the world has changed." The report notes that while it was ahead of the consensus in projecting a steep earnings decline for the TSX Composite in 2009, CIBC World Markets' target for a 15 per cent drop looks optimistic in light of a now deeper slide in economic activity. As a result, the bank is now looking for a roughly 25 per cent broadly based decline in index-adjusted earnings. It forecasts brighter earning prospects for 2010, noting that valuations will continue to look cheap to investors looking at 12-month forward P/Es that extend into that year for earnings. Economic recoveries typically generate sharp earnings rebounds, in part because sectors seeing severe setbacks have a low base for comparison. The report calls for increased earnings for both financials and resource sector companies in 2010, as they put the worst of credit provisions in the former, and recessionary prices for the latter, behind them. CIBC expects TSX earnings will see a 12 per cent rebound in 2010. In line with these lower targets, and the near-term prospects for a further pullback in valuations, the bank is shifting two percentage points of its portfolio from equities to cash. Mr. Rubin believes there is simply too much downward momentum in the marketplace for today's valuations to serve as an attractive buying opportunity. He notes that he needs "to see signs of at least stabilization, if not recovery, in the economy, before adding more weight to stocks." Within the stock sectors, the bank's portfolio is increasingly weighted to defensive stocks, such as consumer staples and utilities. "Our more pessimistic outlook on near-term growth prospects for the economy compels us to move a percentage point of weighting out of base metals and move it into the more defensive consumer staples sector," says Mr. Rubin. The report notes that while defensive stocks started out this year as underperformers, downbeat economic reports have turned the tide, allowing such sectors to again outpace the market. Mr. Rubin remains five basis points underweight in bonds viewing them as a "very problematic sanctuary" as quantitative monetary easing and the massive government deficits that lie ahead suggest that reflation will be a big part of any economic recovery. He is moving a point out of financials, going to a modest underweight in that sector, and adding a point to gold. He is doing so, in part, because of concerns about the fate of the U.S. and global banking system, which are filtering over into Canadian financials. He projects that both banks and insurers will be participants in a rally later this year, but they will need calmer global financial waters, and more signs of success from the Obama administration in dealing with the shaky status of U.S. banks. In going further overweight in gold, Mr. Rubin thinks bullion is likely to take another run well through the $1,000 per ounce level. The report notes that while gold is typically inversely correlated with the U.S. dollar, the metal has temporarily shed this link as prices are climbing despite a strong greenback. Tumbling inflation is also usually unfriendly to gold, but that correlation has also broken down of late. Instead, gold is simply trading as a safe haven with a negative beta to the U.S. equity market. As a result, bad days for American stocks are seeing investors buying gold or gold ETFs. Since he expects more bad news in the markets before it recovers, Mr. Rubin believes that gold has more room to run. However, once equities do rally, he will advocate an underweight position on gold, at least until growth brings inflation fears later in 2010. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/psmar09.pdf. CIBC World Markets is the corporate and investment banking arm of CIBC. To deliver on its mandate as a premier client-focused and Canadian-based investment bank, World Markets provides a wide range of credit, capital markets, investment banking, merchant banking and research products and services to government, institutional, corporate and retail clients in Canada and in key markets around the world.