TORONTO, Feb. 28 /CNW/ - Canadians are turning their focus to building
up their financial assets and would be wise to invest their money at
home, finds a new report from CIBC World Markets Inc.
The report notes that with bonds in what looks to be a longer-term bear
market, investors will be looking to equities to bulk up their
retirement nest eggs - with Canadian stocks likely to produce the best
returns. Unlike the U.S. and Europe, government debt and subsequent
fiscal belt-tightening will not be as a big a drag on the economy in
Canada. The rising inflation concerns in the emerging markets economies
that are threatening to bring about higher interest rates to slow
growth, are also not as much of a concern here.
"A diversified portfolio is always wise, but in terms of allocations for
Canadian equity investors, it may well be that there's no place like
home," says Avery Shenfeld, chief economist at CIBC, in his latest
Economic Insights report. "Relative to the U.S. or east Asia, Canada's
equity market carries more insurance against a worsening geopolitical
climate in the Middle East, in the form of a larger basket of energy
stocks and safe havens like gold shares.
"Inflation hasn't run away to the upside, so the Bank of Canada can
chart a more careful course of tightening than what might end up being
seen in the emerging market economies. The nation's fiscal position,
while still in need of growth-slowing belt tightening, isn't as
strained on either a deficit/GDP or net debt/GDP basis as that of the
U.S. or Europe."
Mr. Shenfeld also notes that Corporate Canada is in good shape with TSX
earnings having considerable momentum. He adds that the bank's new Leading Indicator of TSX Earnings (LITXE) indicates room for further profits ahead. The index is based on nine
economic and financial variables that have foreshadowed index earnings
movements for key TSX members. It was designed to provide investors
with a forward-looking take on a critical driver of market performance,
over a 12-month time horizon.
The value of the LITXE as of December 2010, the last date for which
sufficient component data is available for calculation purposes, was
79. While not quite as high as the peaks seen prior to the recession,
it is somewhat above the level three to four months ago, reflecting
positive movements in several variables, including those for U.S.
growth and commodity prices.
"Historically, a reading in this range has equated to yearly earnings
growth in the 20-25 per cent range, well above the long-term average
and only slightly less than the current bottom-up consensus," says
Peter Buchanan, senior economist at CIBC. "While stocks are by no means
as cheap as earlier, above-trend earnings growth should continue to
provide the market with some support."
Analysis of past trends shows that over three quarters of the variation
in year-to-year returns on the TSX is tied to variations in earnings
expectations. The balance reflects the impact of interest rates and
other factors on the earnings multiple—or amount that investors are
willing to pay for a dollar of future earnings.
The TSX Composite is about four times as resource-intensive as Canadian
GDP, and its mean book value of around $4 billion also far surpasses
the Canadian business norm. As a result, CIBC's LITXE is heavily
weighted towards oil and gold prices, given the importance of those two
components in the index.
"The results also corroborate our past research, suggesting that
earnings and the market take their main cue from offshore activity—U.S.
GDP, in this case—as opposed to domestic trends," adds Mr. Buchanan.
"Canadian stocks are more a bet on global economic conditions than
those closer to home."
Mr. Shenfeld has raised his oil forecast for 2011/12 in light of
political risks in the Middle East and North Africa. "The spread of
Middle East unrest to an OPEC cartel member—albeit one whose production
is just half of Canada's—has seen oil prices attain the highest levels
since mid-2008. Market conditions, however, are not as tight as they
were back then. OPEC now has around 5 million barrels of spare daily
capacity, versus a million barrels two to three years ago, and
industrial country stocks remain ample."
He expects a one per cent downshift in global growth this year as
emerging markets tighten which will see a moderation in the growth of
world oil demand. "We expect prices to fall by $10-15 a barrel when the
tensions in Libya eventually ease, leading investors to refocus on
fundamentals. But the recent spike could persist longer than expected
if incoming regimes prove hostile or unstable, or if violence spreads
to more significant oil producers."
Based on a massive 2010 Q4 inventory drag, Mr. Shenfeld now expects 2011
Q1 growth in the U.S. to come in at 4.1 per cent, upping his full year
2011 forecast to 2.8 per cent. "The extension of fiscal stimulus and a
likely rebound in the labour market should help support consumption
spending and offset the drag from the energy price spike, while
business investment should get a boost from capital write-offs.
"However, we remain below consensus on growth from mid-2011 on as fiscal
policy tightens and the savings rate rises on falling housing wealth.
The persistent strength of energy prices warrants an upward revision to
our headline inflation forecasts, although a much milder core rate will
remain consistent with a no-hike policy from the Fed."
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eifeb11.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 Kevin Dove, Communications and Public Affairs at 416-980-8835, firstname.lastname@example.org