- Published: 09 January 2009
- Written by Editor
Worst may be over for Canadian equity returns: CIBC World Markets
But recovery hopes rest on credible fiscal stimulus packages
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
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.
SOURCE: CIBC World Markets
SOURCE: CIBC
SOURCE: Canadian Imperial Bank of Commerce
please contact Jeff Rubin, Chief Economist and Chief Strategist, CIBC World Markets at (416) 594-7357, This email address is being protected from spambots. You need JavaScript enabled to view it. or Tom Wallis, Communications and Public Affairs at (416) 980-4048, This email address is being protected from spambots. You need JavaScript enabled to view it.