Stick with the TSX in 2008: Rubin

Just because the American economy is in turmoil doesn’t mean investors should turn their backs on Canada as well. In fact, the Toronto Stock Exchange is still a good place to park investment dollars, according to Jeff Rubin, chief strategist and chief economist at CIBC world markets.

The popular economist says the resource and energy sectors are the areas to watch, and investors can expect a lot of M&A activity this year.

“We remain fundamentally bullish on the resource and energy-laden TSX,” he says. “The advent of $100 per barrel oil justifies our large overweight in energy stocks, which in the current price environment will soon be attracting considerable M&A activity.”

Rubin points out that globally, M&A premiums have been running at 30% to 40%, and “we see no reason why acquisitions of Canadian energy assets, particularly oil sands properties, won’t go for as much or more. Overweights in the base metals and gold sectors reflect our optimism on world economic growth, driven by strong overseas economies and our pessimism on the U.S. dollar.”

As a result of the positive outlook, Rubin remains four points overweight in energy stocks and two points overweight in materials.

Despite the TSX’s up-and-down year, 2008 should see the Composite Index hitting 16,200 by next December. A big climb like that might worry some people, but Rubin says today’s financial climate is a lot different than that of the late ’90s.

“This rally has none of the excesses that characterized the doomed tech bull market,” he explains. “Dividend yields, for example, have held steady at roughly 2 1/2%, as growing earnings enabled payouts to climb on pace with stock prices. While that doesn’t sound particularly lofty, the gap to cash and bond yields has been narrowing and will be further trimmed by a quarter-point Bank of Canada cut, which seems likely for January.”

Rubin adds that earning gains should leave room for “solid” dividend growth in 2008. While banks should offer generous dividend gains in the coming months, it’s the utility sector that has the highest dividend yield right now. “Currently, it’s just under 4%, well above bond yields on a tax-adjusted basis,” he says. “We’re adding a one percentage-point overweight to that sector as a result.”

While energy and resources won’t be adversely affected by America’s economic struggles, the financial and industrial sectors could be in for some trouble.

“Mark-to-market prices in assets related to still-rising default rates on U.S. sub-prime mortgages remain problematic for Canadian bank valuations,” reveals Rubin. “At the same time, export-oriented Canadian manufacturing stocks remain exposed not only to a parity exchange rate but to a weak first-half U.S. economy.”

This outlook has pushed Rubin to remain underweight in financials and industrials and cut a percentage point from the consumer discretionary sector.

The economist also thinks that the Federal Reserve will cut its rates by another half point, while the Bank of Canada will drop its rate by a quarter point.

As well, he says the move to freeze some mortgage rates in the U.S. will help decrease mortgage defaults, so as a result, Rubin has moved a percentage point from cash to bonds.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com