Canadian economy likely to sidestep subprime woes and hit new highs, finds a new CIBC World Markets report

Sep 6, 2007


    TSX to hit 16,200 by end of 2008

    TORONTO, Sept. 6 /CNW/ - CIBC (CM: TSX; NYSE) - While there is plenty of
bad news yet to come from U.S. credit markets, CIBC World Markets predicts the
TSX will rebound from recent market turmoil to hit a record 15,000 within the
next six months and climb to 16,200 by the end of 2008.
    "The subprime mortgage meltdown in the U.S. is a temporary and non-lethal
shock to the bull market in Canadian stocks," says Jeff Rubin, Chief
Strategist and Chief Economist at CIBC World Markets. "Even at worst, the sell-
off in the TSX was no worse than last summer's correction and the index has
already re-gained 50 per cent of those losses as investors rapidly scooped up
discounted stocks. The blow-up in the U.S. subprime market, like the collapse
of Long Term Capital Management in 1998, will give way to new highs for both
the stock market and the economy."
    Although the report notes that some US$700 billion of painful resets in
subprime mortgages will occur by the end of next year, Mr. Rubin believes the
market has already priced in the worst of the subprime fallout. "While
delinquency rates are already at 15 per cent - and up to 20 per cent of
outstanding subprime mortgages could end in default - it is now likely that
financial markets have implicitly assumed a far more draconian outcome,
creating an opportunity for arbitrage down the road."
    He also expects the U.S. Federal Reserve Board to address credit fears in
the market by bringing in two quarter-point cuts in the lending rate over the
next quarter. "Concern over credit market liquidity, rather than stock market
valuations, will be the true motivation for the cuts, but they will,
nevertheless, go a long way in bolstering market confidence."
    With the U.S. President already indicating that the Federal Housing
Administration will insure some subprime mortgages that are in arrears,
financial institutions will be encouraged to continue to lend to the U.S.
subprime market. This will also lower financing costs on refinanced mortgages
by improving their credit quality. The report notes that the Federal Housing
Administration initiative will likely be enhanced as political pressure grows
on both the Bush Administration and Congress to bail out mortgage borrowers.
    With growth in the Canadian economy outperforming Bank of Canada
expectations over the first half of the year, CIBC World Markets does not
expect the Bank to match the U.S. Fed rate cuts and undo its July rate hike.
However, liquidity concerns, particularly in the asset-backed commercial paper
market, will see the Bank of Canada stay on the sidelines and shelve any
further plans for tightening. With near-record oil prices and two Fed rate
cuts, the Canadian dollar is likely to regain momentum and reach parity
against the greenback by the end of the year.
    While there's some risk that the meltdown in the U.S. subprime mortgage
market could bring North American economic growth down with it, Mr. Rubin sees
little evidence of contagion effects to the U.S. consumer. "The transmission
mechanism for contagion to the U.S. consumer is through a rising personal
savings rate, which is currently languishing near record lows below one per
cent. Should the saving rate rise only modestly to two to three per cent,
consumer spending would tank and with it the American economy. But aside from
some benchmark revisions, the personal savings rate hasn't budged since U.S.
housing prices turned south. And until it starts rising, U.S. consumer
spending is not at serious risk."
    The report notes that while there is scant evidence of contagion effect
in the real economy, outside of the direct effects in home construction, there
is plenty of evidence of contagion in credit markets, far flung from sinking
U.S. real estate values. Asset-backed commercial paper is one such casualty as
are interbank lending spreads. The credit shockwaves from the U.S. subprime
mortgage market have also impacted corporate spreads which have widened
considerably. The report notes that in effect, rising default rates in the
subprime market have been a catalyst for a systemic repricing of risk in
global markets.
    As a result of the recent market correction, the bank is fine-tuning its
equity portfolio by moving a full percentage point of weighting out of
telecoms and moving a half-point into the heavily-sold base metals sector and
a half-point to non-bank financials.
    "Global financing for leveraged buy-outs by private equity has fallen off
a cliff and its diminished role in financial markets going forward is likely
to hurt sectors in the TSX like telecom and media that have heavily relied on
these funds to support merger activity," adds Mr. Rubin.
    "At the same time, base metal stocks, thrashed some 25 per cent in the
recent selloff, seem oversold. We are adding a half a percentage point of
weighting to our position in metal stocks on the belief that global economic
growth will remain robust."
    He also added half a percentage point of weighting to non-bank financials
which he believes look increasingly attractive in today's marketplace. Mr.
Rubin believes Canadian insurance companies, with their large overseas
operations, should also benefit from strong global economic growth while REITs
should enjoy the support of a strong commercial property market in Canada.
    The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/pssep07.pdf.

    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: please contact Jeff Rubin, Chief Strategist and
Chief Economist, CIBC World Markets at (416) 594-7357, jeff.rubin@cibc.ca
or Kevin Dove, Communications and Public Affairs at (416) 980-8835,
kevin.dove@cibc.ca


rss