But expect energy, materials to spur late year turnaround for TSX
TORONTO, Feb. 5 /CNW/ - CIBC (CM: TSX; NYSE) - North American stock
markets face further declines this spring with the prospect of significant
writedowns by North American banks and weakness in the U.S. economy, notes a
new CIBC World Markets report.
"The tandem of falling (U.S.) housing prices and rising default rates
should trigger as much as another US$30-50 billion in asset writedowns by
North American banks over the next quarter, which, together with a visibly
struggling U.S. economy could be a catalyst for another five percent
correction," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC
World Markets in his monthly Canadian Portfolio Strategy Outlook report.
"Already at US$140 billion, world-wide writedowns on U.S. subprime
mortgage assets are likely to peak in the US$265 billion range over the next
year," says Mr. Rubin, adding that those losses are likely to occur in spite
of both Fed easing and efforts by Washington to spare over 300,000 mortgage
holders from painful mortgage resets.
"As long as falling (U.S.) house prices continue to generate significant
negative home equity among subprime mortgage holders, default rates will
continue to rise even if subprime mortgage rates do not," says Mr. Rubin. "A
double-digit decline in housing prices will bring a concomitant increase in
default rates which will likely approach just under 30 percent by the fourth
Yet despite the near-term bumpiness, Mr. Rubin remains bullish on the
year. "While interest rate cuts and fiscal stimulus will not salvage
U.S. housing prices or prevent subprime mortgage default rates from rising,
they should go a long way in containing broad contagion effects to the rest of
the economy," he says, adding that "a 2.5 percent federal funds rate should
resuscitate the U.S. economy and North American equity markets by the second
half of the year."
Mr. Rubin also points to continuing strength in overseas economies and
the prospect of triple-digit oil prices over the next twelve months which
"should set the stage for a powerful second-half rally in the market that will
see the TSX end the year at 14,500." These conditions should also see the
energy and resource laden TSX hitting 16,200 by the end of 2009, he says.
To guard against interim volatility, Mr. Rubin is cutting the weighting
of stocks in his model portfolio by nine percentage points, and putting that
money into bonds. "We would expect to be adding weight back to our equity
position over the latter half of the year" as markets move closer to his
targets, says Mr. Rubin.
By sector, Mr. Rubin remains "overweight" in energy, gold and base metal
stocks which he says have been undervalued by subprime jitters. "We continue
to like the energy and commodity side of the market which is largely detached
from the problems of the US housing market and even the more general outlook
for the US economy," he says.
Meanwhile, Mr. Rubin is raising his target for bullion prices to
US$1,000 per ounce this year and is reaffirming his "overweight" stance in
this sector. He's also forecasting that base metal prices, while not keeping
pace with gold prices, "should remain at historically high levels despite the
performance of the US economy, reflecting robust economic growth not only in
China but in other resource-intensive developing economies like India and
Mr. Rubin is also reducing his weighting in banks and telecoms by a
further half-percentage point each, and moving those funds into utilities.
The complete CIBC World Markets report is available at:
CIBC World Markets is the wholesale and corporate banking arm of CIBC,
providing a range of integrated credit and capital markets products,
investment banking, and merchant banking to clients in key financial markets
in North America and around the world. We provide innovative capital solutions
and advisory expertise across a wide range of industries as well as top-ranked
research for our corporate, government and institutional clients.
For further information:
For further information: Jeff Rubin, Chief Economist and Chief
Strategist, Managing Director, CIBC World Markets at (416) 594-7357; or Tom
Wallis, Communications and Public Affairs at (416) 980-4048,