CIBC trims TSX outlook

Investors may want to hold their cash and watch for an entry point before jumping back into the equity markets, as there may be yet another leg down before a recovery firms up in the second half of 2009, according to a report from CIBC World Markets.

The research department of the bank has trimmed 1,000 points off its 2009 year-end target for the S&P/TSX Composite Index, but the market should still manage to post a total return of more than 20% on the year. The index is now expected to end next year at 11,000.

“We continue to expect the North American economy to contract over the first half of the year, with near-term punitive consequences for earnings,” writes CIBC World Markets chief economist and chief strategist Jeff Rubin in his latest Canadian Portfolio Strategy Outlook Report. Investors piling into the market now should be prepared for some short-term shocks.

Rubin, who is notoriously bullish on the TSX and its commodity sectors, expects the U.S. to embark on a massive infrastructure program once President-elect Barack Obama assumes control.

The resulting nationwide construction zone should drive commodity prices higher by mid-2009, providing “more than reasonable” returns on the Canadian index. Energy stocks, which have been beaten down by falling oil prices, should benefit from the U.S. building program.

“While demand destruction from the current recession has sent oil prices plunging below US$50 per barrel, supply destruction, including cancellations in the Canadian oil sands and offshore projects around the world, will see crude soar back to triple-digit territory toward the end of next year and into 2010.”

In the meantime, Rubin’s model investment portfolio remains virtually unchanged, save for a small re-allocation of one percentage point from gold stocks to telecoms, which he sees as a defensive play in recessionary times.

The model portfolio maintains a market weight in equities (50% of the portfolio), with an overweight position in cash — 15%, versus 11% for the benchmark portfolio. Fixed income makes up the remaining 35%.

“In the past, the inflationary consequence of monetizing deficits has robbed bond investors of as much as 30 per cent of their real return,” Rubin explains.

“After decades of fighting inflation, the (U.S. Federal Reserve) is about to actively seek its return. Not only will inflation ease the burden of the nation’s debt, of which almost half is now owned by foreigners, but reflation will also raise asset prices and the value of many of those mortgage-backed securities, which now reside on the Fed’s own balance sheet.”

(12/03/08)