Investors searching for growth opportunities may look to Brazil, Asia
TORONTO, Oct. 9 /CNW/ - CIBC (CM: TSX; NYSE) - An uneven and modestly-paced global rebound in 2010 means investors will have to dig deep to find growth opportunities in sectors and markets overlooked in the past, finds a new investment strategy report from CIBC.
"The world's economy is again in drive, but operating only on half its cylinders," said one of the report's contributors, Avery Shenfeld, chief economist at CIBC.
This environment makes it challenging to find growth opportunities but Mr. Shenfeld says the signs are pointing investors to "countries and sectors with less of a lingering hangover from the financial shock" which are generally positioned for better returns on equities and better spread performance on corporate bonds.
Countries such as Brazil and emerging markets not at the epicentre of the sub-prime mortgage and structured credit crisis are "positioned for a decent rebound, along with emerging Asia, where banks avoided the deep losses experienced in Europe and the U.S." says Mr. Shenfeld.
This is holding true whether one looks at equities, fixed income or currencies for "emerging markets and markets that have high exposure to them," notes Michael Rosborough, executive director, strategic risk. The road to recovery he says has been led by credit and interest rates, then emerging equities, and finally G7 equities.
Mr. Rosborough also notes that G7 equities, and particularly those of the U.S. and U.K. that had been hit the hardest during the credit crunch, may take a long while to fully recover, but the troughs are so deep that the rebound potential is ultimately the greatest.
Other key findings in this month's report:
Brazil fundamentals provide a currency opportunity: "Brazil has been hot, and it is getting hotter," the report states. "Brazil declared an end to the recession after only six months, all of its sovereign debt ratings are now firmly investment grade after the latest upgrade from Moody's, and it enjoys capital flows into the economy. We believe that the appreciation of the Real still has room to continue, and expressed this belief through a structured trade."
All the glitters isn't golden: "We have three reasons to move to underweight on gold," the report states. "1) Weak dollar drove the recent rise of gold, and we believe that the dollar has overshot to the downside, with a relief rally expected in the next two to three quarters, 2) Investor anxieties continue to subside, crimping appetite for financial insurance, including gold, and 3) We see an unwinding of the present exaggerated market fears about near-term inflation."
Credit - what's hot and cold: "Global credit default swap (CDS) markets rallied hard from the widest levels in late 2008-early 2009," the report notes. "CDS sector spreads overall are still three times their tightest levels of June 2007. Current projections for default rates are also three times those made in the summer of 2007. At this stage in the cycle, there is little value left in sector plays, and we now seek value through security selection."
Credit fundamentals come home to roost for Canadian provinces: "Credit fundamentals are reasserting their influence on provincial spreads, the report notes. British Columbia looks notably cheap to Ontario given its underlying credit strengths, while Manitoba's current spread to Ontario is seen evaporating. And Québec continues to offer relative economic outperformance and an expectation of relatively lighter supply.
The report, entitled Global Positioning Strategies (GPS), is a new monthly note from CIBC that responds to investors' increasing interest in a cross-asset investing perspective versus a focus on individual asset classes. The past year's credit crisis has underscored that correlations across markets can play a major role in driving returns on any one asset class, and that a macro perspective is key to anticipating such swings.
The complete report is available at: http://research.cibcwm.com/economic_public/download/gps_oct09.pdf
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SOURCE CIBC World Markets
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