Winter of discontent ahead for investors but summer may see improvement: CIBC World Markets report

CIBC (CM: TSX; NYSE) - Despite a steady stream of bad economic and financial news, 2009 could prove to be a happier new year for investors, notes a new CIBC World Markets report.

"A winter of our discontent is in store, and spring may not yet see any improvement," says Avery Shenfeld, senior economist in a note to clients today. However, financial markets "are starting to look ahead to a better, if not yet glorious, summer."

Mr. Shenfeld's optimism is based in part on the S&P 500 index which is "essentially no worse off than it was back in mid-October." He also points to a cooling U.S. dollar, and the energy-laden TSX, which has managed a sideways trend despite cheaper oil prices. "The North American equity market has become an oasis of relative calm in recent weeks," he notes.

Stock valuations also support a stronger picture for the back half of 2009, according to senior economists Peter Buchanan and Meny Grauman in the same report. "While the near-term picture for the economy and profits isn't pretty, our analysis of underlying fundamentals suggests stock valuations have already discounted a good deal of bad news.

"Valuations point to (the) upside for stocks over the medium-term. That's particularly likely if the world economy begins to emerge from the doldrums beyond mid 2009, rekindling resource demand, and as actions by the Bank of Canada and the (U.S. Federal Reserve) help ease stresses closer to home."

But the economists caution that any equity rebound is likely to be restrained by "ugly" economic news that is eroding near-term profit outlook. Accordingly, CIBC World Markets expects 2009 earnings among TSX composite firms to decline by 15% on the basis of continuing difficult economic conditions and resource prices.

Another drag on confidence and the economy in early 2009 will be the reluctance of consumers on both sides of the border to spend money, despite the best efforts of government to make that happen. Instead, consumers will be putting cash away to cover their losses in home valuations and investment portfolios.

"If fiscal policy is going to boost overall spending, the government will have to do the first round of buying itself," say Mr. Shenfeld and senior economist Benjamin Tal. "Efforts to line consumers' pockets through temporary tax relief could simply see the funds diverted to savings, as we saw with much of the rebate given to Americans in the second quarter of 2008."

In Canada, where equities fell sharply in Q4, and house prices are in retreat, savings rates will push higher in the months ahead, the economists say. But the overall drag on retail activity should be cushioned somewhat as Canadians have not borrowed against home equity as aggressively as Americans have, and therefore the decline in asset values will represent a smaller hit to their net worth.

Yet with North American consumers reluctant to borrow and spend, East Asian consumers will likely be carrying the ball in world growth, say Mr. Shenfeld and Mr. Tal.

"Currency appreciations should improve the global buying power of Chinese and Japanese wages, while the high existing savings rate gives monetary easing a better chance of sparking Chinese consumer demand," says Mr. Shenfeld. "That suggests that commodities demand to feed into Chinese manufacturing for its domestic and regional market could rebound before we see American consumers return to their former vigour."

The complete CIBC World Markets report is available at:

http://research.cibcwm.com/economic_public/download/sdec08.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

Avery Shenfeld, Senior Economist, at (416) 594-7356, 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.