Despite recent downturns, equity markets on both sides of the border
expected to deliver modest returns in the coming year
TORONTO, Oct. 8, 2015 /CNW/ - While slow global economic growth will
continue to drag on performance, now is not the time to bail on
equities, finds a new report from CIBC World Markets.
Following the worst quarter in years, both the Canadian and U.S. equity
markets will deliver overall modest but positive real returns. A modest
improvement in commodity prices, marginally better overall GDP growth
and the benefits of a weaker Canadian dollar on foreign earnings will
drive the Canadian lift.
"Our top-down earnings model, which looks at indicators like economic
growth and resource prices, points to 10 per cent growth in earnings
for the TSX in the next four quarters," says Avery Shenfeld, Chief
Economist at CIBC, in a report co-authored with Economist Nick Exarhos.
"While slow economic growth may indicate middling equity market
performance, now is not the time to sell given that alternative cash
and bond yields are so abysmally low."
While promising compared to declines in the last four quarters, the 10
per cent growth outlined in the report trails the 20-30 per cent
analyst consensus. Mr. Shenfeld believes this is largely because equity
analysts are still in the process of moving their oil price
expectations down to what investors are already assuming.
"On a forward PE basis, Canadian non-resource stocks are now at
historically cheap levels relative to comparable stocks on the S&P 500,
which suggests these could outperform those in the U.S. in coming
quarters," adds Mr. Shenfeld.
For U.S. equities, a cyclical adjusted price-to-earnings (CAPE) ratio is
consistent with a 5 per cent annual nominal return in the decade ahead,
with the report's other benchmarks also spelling mediocre rather than
negative returns ahead for equities.
Mr. Shenfeld also believes that companies may find it attractive to
issue debt and do share buy-backs given low bond yields relative to
earnings yields, also supporting equities.
"As both Canadian and U.S. equity markets will overall experience modest
but positive real returns, the news has me shouting two cheers for
equities," concludes Mr. Shenfeld.
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eioct15.pdf
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SOURCE CIBC World Markets
For further information:
Avery Shenfeld, Chief Economist, CIBC World Markets Inc. at 416-594-7356, email@example.com or Olga Petrycki, Director, External Communications, CIBC, 416-306-9760, firstname.lastname@example.org.