Buyouts to drive equities, run up debt: CIBC

While the Bank of Canada frets over the latest inflation figures, one of Bay Street’s most notorious bulls is convinced that the good times will continue to roll on the Canadian equity markets.

CIBC World Markets’ chief strategist Jeff Rubin, already recommending an overweight equity position, boosted the stock allocation for the Strategy Canadian Portfolio model by another two percentage points this week.

Rubin and his team have consistently recommended a low-to-zero allocation to cash, so the extra money is coming out of the bond portion of the recommended portfolio.

“We are raising our year-end target for the TSX Composite to 15,000, bringing our expected total return from stocks, including the dividend yield, to 18.5%,” Rubin announced in his monthly portfolio update.

That may sound optimistic to some, considering the TSX has been on a commodity-fuelled tear for the past five years. Over the past three years alone, the index has posted average total returns of nearly 20%.

But Rubin points to the vast pool of global liquidity and the increasing appetite foreign buyers are showing for Canadian companies. Mergers and acquisitions have by no means been contained to the Canadian market. This week alone saw bids announced targeting Yahoo, news agency Reuters, music publisher EMI and steel producer Ipsco.

“Not only is the TSX likely to see another year of strong earnings growth but valuations are also likely to benefit from further M&A activity, which has recently reached a frenzied pace globally,” the report said. “A new twist in the mergers and acquisitions game is the rapidly expanding pace of private equity leveraged buyouts.”

Leveraged buyouts have also had an impact on the bond markets, as the acquirers head to the market to fund their purchases.

“While leveraged private equity buyouts are pushing up valuations in the equity market, they are having the polar opposite impact in the bond market,” he said. “Corporate bond spreads have widened materially, as many prospective buyout candidates do not have adequate covenant protection in their bonds.”

He has not completely discounted the likelihood of rising interest rates, though, cutting the portfolio’s allocation to the financial services sector by two percentage points. The sector still makes up 34% of the equity portfolio, however, representing a 2% overweight from the benchmark.

So where is that capital flowing? Rubin has increased the portfolio’s allocation to non-gold materials stocks by 1%, and added 1% to the utilities sector.

“Copper and nickel prices are near all-time highs, while soaring metals prices are spurring widespread consolidation in the global mining and metal processing industries,” he explained.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com