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.

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