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The worst period for Canadian equity returns in generations may already be over, but recovery will depend on whether North America launches a credible fiscal stimulus package in the coming weeks, notes a new CIBC World Markets report.

“The bad news is that we are in a recession, and a fairly deep one at that. The good news is that the stock market has already discounted a depression,” Jeff Rubin, CIBC World Markets chief economist and chief strategist, said in his latest Canadian Portfolio Strategy Outlook Report.

The report predicted that with deep interest rate cuts and fiscal stimulus efforts underway in most of the world’s major economies, global growth would likely return by the second half of 2009, spurring on the TSX composite index.

While progress is expected in the next two quarters, the majority of the climb, Rubin said, will come after a mid-year economic upturn. For that reason, he remains market-weight on equities in his model portfolio.

Given the uncertain timing of an economic recovery, Rubin’s recommended portfolio weights continue to steer away from the sectors most exposed to downside economic risks, with overweights in some of the traditional safe havens, like utilities and consumer staples.

Compared to the United States, Canadian wealth losses have been milder thus far, but housing values are still in retreat, and consumers will be cautious on big-ticket spending. As a result, Rubin is recommending heavy underweights in equities tied to consumer discretionary spending and autos.

As a result of more realistic valuations in the technology sector, he no longer suggests as heavy an “underweight” stance and has added a percentage point of exposure. That move was funded by a single point reduction in his already underweight position in industrials.

When it comes to commodities, Rubin notes non-precious metals and lumber are still mired in recessionary conditions, and base metals will post much lower average prices in 2009. He continues, however, to favour gold as a hedge against an eventual return of both inflation and U.S. dollar depreciation.

As for oil, the seeds are being sown for a sharp rebound in crude prices during the next global recovery, with a taste of that to come in late 2009. Rubin expects it won’t be very far down the road of an economic recovery before oil prices once again touch triple-digits. “And when they do, our overweight in oil stocks will be there to reap the rewards.”

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Canadians focus on debt reduction

Whether the economy is going to improve in 2009 or not, Canadians are battening down the hatches, with a new focus on reducing their debt-load in the new year, according to a survey conducted by Acrobat Research for Manulife Financial.

The 40th quarterly reading of the Manulife Investor Sentiment Index found 35% plan to pay down debt this year. Sentiment fell 3 points to a reading of +5, the lowest since the survey began in 1999.

Overall consumer debt was the focus for 24%, while another 11% were going to concentrate on paying down their mortgage.

“Many Canadians have been unsettled by recent market and economic turmoil and feel it’s time to seek a safe haven,” said Paul Rooney, president and CEO, Manulife Canada. “We always encourage investors to work closely with their own advisors, particularly given short-term changes in the economy and markets.”

Despite the softening economy and the stock-market collapse of late 2008, 51% of respondents said they were financially better off than they were five years ago. Last year’s survey found 60% felt better off.

Roughly a quarter (27%) said they were neither better nor worse off, and 22% said their financial position was worse now than five years ago.

Just 14% said their top priority for the year was saving for retirement. As for how they will invest, 72% said they had no plans to change their approach as a result of the downturn, while 10% said it had permanently affected how they will invest.

Canadians continue to say they will invest in their current home, either by doing renovations or just paying down mortgage principal. Fifty-four percent said it was a good time to do so.

Cash is the second-most popular place to invest.

Equity investments gained ground, slightly, with 24% saying it was a good time to invest, while 49% said stocks were a bad choice.

Balanced funds were slightly more popular, with 29% favouring them, while 40% shunned them.

The RESP now matches the RRSP as the most popular investment vehicle, with 49% favouring both plans, while 19% think it is a bad time to invest in either.

Only 30% said now was the time to buy mutual funds, compared to 42% who said it was not.

• • •

CLC calls for jobs-oriented budget

The Canadian Labour Congress reacted to the latest string of dismal employment numbers — a loss of over 70,000 full-time jobs in December and a net creation of just 7,100 full-time jobs for all of 2008 — with a call to the federal government to take bold and direct action aimed at creating jobs and helping the unemployed.

“The upcoming federal budget must focus on creating full-time jobs and fixing our broken Employment Insurance program. It can’t just focus on the needs of the banks and corporations that got us into this mess,” noted Ken Georgetti, president of the Canadian Labour Congress.

EI benefits have become smaller than they used to be and do not last as long. In recent years, 6 in 10 unemployed men and 7 in 10 unemployed women failed to qualify for any benefits, even though they had paid EI premiums.

“Fixing this important program must be part of the government’s plan to help people get through what is now an economic recession,” Georgetti said.

In addition to some succor for the unemployed, Georgetti suggested the upcoming budget also needed to kick-start the economy through major public spending on infrastructure to create jobs. It must also contain measures to protect a further loss of jobs, particularly in manufacturing, mining and forestry, as well as safeguards to protect the pensions and retirement savings of Canadians.

Of the 59,400 jobs lost in the private sector in Canada last month, 44,300 were in the construction industry. Young workers (aged 15-24) and men aged 25-55 were the hardest hit. The number of unemployed youth increased by 15.6% from the same time last year.

• • •

Pension deficits hit record high

The chaos occurring in the world’s financial markets over the last year has had a serious impact on pension plan funding and will negatively impact corporate earnings in 2009, according to the latest estimates by Mercer.

The firm reports that pension plans sponsored by the largest U.S. companies have seen a decline in funded status from 104% at the end of 2007 to 75% as of Dec. 31, 2008. This equates to losses of an estimated US$469 billion over 2008, causing an aggregate surplus of $60 billion at the end of 2007 to be replaced an estimated aggregate deficit of $409 billion at the end of 2008. Mercer also expects pension expense is to increase from $10 billion in 2008 to an estimated $70 billion in 2009.

“The majority of U.S. companies have their financial year-ends at Dec. 31,” says Adrian Hartshorn, a member of Mercer’s Financial Strategy Group. “The decline in funded status will be capitalized and reflected in corporate balance sheets for many companies. This will reduce balance sheet strength, which leads to consequences for several areas of the business, including capital expenditure decisions, loan covenants and credit rating decisions.”

Hartshorn adds that the pension expense that companies report in their financial statements is likely to be significantly higher in 2009, despite the smoothing options available to companies under the Financial Accounting Standards, which will reduce corporate profitability and reported 2009 earnings.

(01/09/09)