CIBC's Rubin sees double-digit returns on TSX for 2007
Thursday, January 04, 2007
TORONTO — CIBC World Markets is predicting double-digit returns will continue on the Toronto Stock Exchange in 2007, thanks to global demand for resources, though overall gains may not match those of 2006.
“Continued strong-demand for energy, gold and base metals will push the TSX composite to 14,250 by year-end, despite a sluggish domestic Canadian economy,” the investment company said Thursday in its Canadian portfolio outlook report.
“While returns will likely be somewhat lower than the 17 per cent yielded by the TSX in 2006, the market's overall performance will be that much more notable this year in light of a weakening Canadian economy,” said Jeff Rubin, chief strategist and chief economist.
“The growing wedge between TSX performance and Canada's overall economic performance will underscore the extent to which the TSX has far more leverage to strong world growth than weak North American growth.”
CIBC World Markets also forecast a 2.2 per cent increase in Canada's gross domestic product this year, the slowest economic growth since 2003 — a year that was hit by both the SARS outbreak in Toronto and power blackouts in Ontario.
The report says the TSX doesn't reflect the overall outlook for the Canadian economy.
“Motor vehicles and forestry products, two huge but now struggling segments of the country's GDP, are hardly represented in the TSX at all,” Mr. Rubin said.
“Forestry stocks have shrunk from four per cent of market capitalization 15 years ago to a scant 0.7 per cent and as a result have become effectively irrelevant to index performance. And while the auto sector is hugely overweight in the composition of both Canadian manufacturing and Canadian GDP, it's decidedly underweight when it comes to TSX representation, accounting for only 0.8 per cent of the index.”
The report adds that mining and minerals, oil and gas and financial services carry a huge weighting in the TSX relative to their weighting in the Canadian economy.
“In the case of energy, the sector is almost 10 times as important to the TSX than to the economy,” CIBC World Markets said.
“The mining and minerals sector is about four times as important in TSX market cap than in GDP while the banks and financial services sector is about 31/2 times more important in the stock market than in the economy.”
The report also says a weakening North American economy is likely to make Canadian banks a winner, particularly in terms of their superior credit position.
In addition to banks, the report recommends investing in energy stocks, particularly uranium and oilsands producers. CIBC World Markets has revised its uranium price target and now expects it to hit $100 (U.S.) a pound by the end of 2007.
“The fact that Canada now accounts for almost 60 per cent of the world's oil reserves open to private investment suggests that Canadian energy properties, and the companies that own them, will be hotly pursued by international firms relying increasingly on unconventional deposits for reserve replacement,” Mr. Rubin said.
CIBC World Markets is the wholesale and corporate banking arm of CIBC.
