"Enough upside" ahead to justifying staying in stocks

    TORONTO, July 9 /CNW/ - CIBC (CM: TSX; NYSE) - Doubts about the timing
and strength of the upcoming economic recovery could see equities flat or in a
further correction this summer, but prospects for solid gains remain on the
table over the next 18 months, notes a new report from CIBC World Markets.
    "Only the most nimble market timers should think about going underweight
equities at this point in the cycle," says Avery Shenfeld, chief economist, in
his latest Canadian Portfolio Strategy report. "There's enough upside over the
18-month horizon to stay benchmark-weighted, and anything more than a 10%
further correction would represent a good opportunity to add weight."
    One positive Mr. Shenfeld sees for stocks is that Canadian households and
businesses are flush with cash. The extra money held by individual Canadians
is likely to find its way into equities, he says, while high liquidity levels
for companies "reduces (their) sensitivity to recessionary financial strains"
and will enable them to tap "capital markets to boost sales and profits in the
future when the economy turns."
    Further supporting a renewed equity rally by year end is the continuing
determination of central banks to add liquidity, says Mr. Shenfeld. And
historical sensitivities suggest further upside to stocks following the rapid
growth in recent quarters of the M2 money supply, which measures cash outside
banks as well as personal and other deposits. "Policymakers haven't exhausted
the options available to provide additional stimulus if necessary, and
investors are rightly rejecting the worst case scenarios kicked around earlier
this year."
    Another positive for equities is that corporate earnings may have seen
their worst. "The good news south of the border is that the earnings picture
is looking a bit less ugly," says Mr. Shenfeld, pointing to more positive
estimates for the upcoming quarter and present year, following a
better-than-expected Q1 performance by S&P 500 members.
    In Canada, Mr. Shenfeld says consensus earnings this year now appear
"sufficiently conservative" so that "we should see some modest upside
surprises in the second half."
    He notes the consensus sees TSX earnings falling 27 per cent in 2009 - a
"sobering number but less severe than the 80 per cent drop incurred in the
debilitating 1990-91 recession, when a runaway currency slammed exporters, a
risk that looks less likely after the recent cooling off in the Canadian
dollar."
    Mr. Shenfeld also notes that "while year-on-year earnings growth for the
TSX composite index is unlikely to show a positive handle until Q4, matching
the consensus call for a 33 per cent drop off in Q2 would nonetheless
represent an improvement over Q1's 43 per cent year-on-year decline, the
probable low point for the current cycle."
    And more importantly, says Mr. Shenfeld, is that "longer term valuation
metrics still show ample headroom for equities, even if the first year of
expansion proves to be as tepid as we suspect."
    Elsewhere in the report, Mr. Shenfeld sees specific upside in
telecommunications services stocks. "Multiples in the sector remain relatively
affordable in historical terms and the four largest players all surprised to
the upside in the latest earnings reporting quarter. Wireless data represents
the largest area of growth. While that product line is not immune to the
recession, the sharper than warranted decline in wireless valuations on such
concerns has created a buying opportunity."The complete CIBC World Markets report is available at:
    http://research.cibcwm.com/economic_public/download/psjul09.pdfCIBC's wholesale banking business provides a range of integrated credit
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