Rising industrial production in East Asia signals start of recovery: CIBC

    Equity investments in 'early movers' like base metals may reap rewards

    TORONTO, May 11 /CNW/ - CIBC (CM: TSX; NYSE) - The base metals sector
warrants increasing investor attention as industrial output rises in Asia and
prospects grow for a year-end rebound in North American production, notes a
new report from CIBC World Markets Inc.
    "Industrial activity is indeed already picking up, not in green shoots in
North America, but in bamboo shoots in East Asia," says Avery Shenfeld, chief
economist, in his latest Canadian Portfolio Strategy report. "Factories there
are sparking back to life."
    China appears to be first in the region to have turned the corner, notes
Mr. Shenfeld, with its rising metal imports and fixed asset investment, and an
uptick in the country's Purchasing Managers Index.
    And there are signs elsewhere in East Asia that factories are "beginning
to edge back into gear" with production in Japan rising 1.6 per cent in March,
the first material gain in 10 months. Estimates for April and May see monthly
increases of 4.3 per cent and 6.1 per cent respectively. Meanwhile, industrial
production in Korea posted a 4.8 per cent monthly gain in March on top of a
7.1 per cent rise in February.
    The easiest way for Canadian investors to play these signs of recovery is
to add exposure "to sectors that tend to be early movers in an industrial
production recovery," says Mr. Shenfeld. He suggests investors look at
non-energy commodities, particularly base metals.
    "Base metals historically have been among first resource-space movers,
meaning that related equities have historically tended to outperform the
market in the late stages of recession and early in recovery.
    "Although the base metals sector has been one of the markets' best
performers of late, stocks are still trading about 50 per cent below levels
reached during the boom," adds Mr. Shenfeld. "Non-energy commodity prices
typically rise in the early stages of recovery, or even before, in part due to
the fact that firms must rebuild inventories, before they can reactivate
production lines."
    Also supporting base metals demand is "an Asian-centric recovery driven
by infrastructure spending," says Mr. Shenfeld. "China's $586 billion stimulus
package is focused on housing and infrastructure, including railroad and grid
expansion - highly metal-intensive areas of activity."
    Elsewhere in the report is a favourable outlook for Canadian financials
where Mr. Shenfeld says the "cloud of uncertainty weighing on the sector (is
beginning) to lift."
    Canadian financials still face a tough year for credit performance, he
notes, but "the doomsday scenarios that took financials down to six-year lows
are looking increasingly unrealistic, removing a serious downside risk."
    As for the broader outlook for equities and the TSX, Mr. Shenfeld
believes "we're in the early stages of a bull run."
    Investors could see a breather or partial pullback on soft economic news
in the quarter ahead but Mr. Shenfeld notes "there's enough medium-term
upside" to be benchmark-weighted in stocks. "Because ultimately, the market is
right in anticipating earnings growth in 2010 and beyond, even if headwinds
associated with earlier excesses in lending leave the first year of a global
recovery running at a tepid pace."
    The "waning months of recessions have historically been a good time to
hold stocks," he says, adding that "there remains ample headroom for a
multi-year bull market ahead."

    The complete CIBC World Markets report is available at:

    CIBC's wholesale banking business provides 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: Avery Shenfeld, Chief Economist, CIBC World
Markets Inc. at (416) 594-7356, avery.shenfeld@cibc.ca; or Tom Wallis,
Communications and Public Affairs at (416) 980-4048, tom.wallis@cibc.ca

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