News

Despite market turbulence, strong economic fundamentals will see TSX hit record 14,250 by year-end

March 8, 2007

Toronto - Solid global economic fundamentals will see the TSX hit the 14,250 level by year end according to CIBC World Market's latest Canadian Portfolio Strategy Outlook, despite jitters triggered by a sell-off in the sizzling Chinese market.

"The correction in the Shanghai Composite is nothing more or less than a local adjustment to speculative froth, as evidenced by the preceding 140 per cent rise in Chinese valuations in the year prior to the one-day nine per cent decline," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets. "Indeed global industrial production looks like it's heading for another banner year of growth. That's bullish for a stock market like the TSX, which is more levered to global growth than domestic growth."

The report notes that the economic news from China, as from a number of other places like Japan, UK, Italy and Germany has been decidedly better than equity markets were counting on at the beginning of the year. The underlying strength in overseas economic growth continues to lend support to commodity markets.

Oil prices, after plunging to a 20-month low earlier in the year, have rallied back to over US$60 per barrel. More rapid than expected depletion in conventional fields like Mexico's Cantarell, together with still-robust demand growth outside of the OECD, should push crude prices above US$70 per barrel by summer. CIBC World Markets expects gold, natural gas and uranium prices to all climb in 2007.

Mr. Rubin believes the short-term contagion effect on the TSX from the sell-off provides investors who have been light in TSX exposure an excellent opportunity to add to their stock position at discounted values. "Global stock market contagion from the recent sell-off in the Chinese market opens up an attractive buying opportunity for those wishing to add to TSX equity holdings. Notwithstanding the market turbulence of the last several days, we believe that solid overseas fundamentals support a 14,250 TSX level by year-end."

Consequently, CIBC World Markets' recommended portfolio strategy remains heavily overweight in stocks. The portfolio has stocks 10 percentage points over benchmark at the expense of a reduced bond weighting and a zero cash position. The portfolio remains tilted towards the cyclicals, with overweights in both materials and energy, reflecting the TSX's closer correlation to global growth than to Canadian growth. It also recommends an overweight position in the fertilizer sector, which is soaring on American plans to dramatically boost ethanol production to address concerns about green house gases and global warming.

On the interest rate front, Mr. Rubin believes a troubled U.S. housing sector should ultimately subdue the consumer and prompt the U.S. Federal Reserve Board to cut rates. "While there is little in our view to warrant fears of a global slowdown, there are legitimate reasons to remain cautious about the U.S. economy and in particular its problematic housing market," adds Mr. Rubin.

"An ongoing drop in home prices is a poignant reminder to markets that we are still a long way from working out the adjustment in U.S. real estate. While tight labour markets will keep the Federal Reserve Board on the sidelines for the first half of the year, potential contagion effects from a crumbling housing market will compel second-half rate cuts."

Those cuts are likely to be matched in Canada, where a rebound in energy prices would otherwise create some unwelcome strength for the Canadian dollar and additional challenges for an already beleaguered manufacturing sector in central Canada.

The report notes that falling interest rates favour the financial sector, and in particular REITs. REITs not only have a very high sensitivity to falling bond yields but are also benefiting from tighter commercial property markets and their exemption from recently announced tax changes to the rest of the trust sector. As a result, CIBC World Markets has added a percentage point to the sector this month.

The CIBC World Markets Canadian Portfolio Strategy Outlook report is available at http://research.cibcwm.com/economic_public/download/psmar07.pdf