Wednesday, January 02, 2008

Varying Outlooks for 2008

George Vasic - UBS Securities Canada Inc.

The TSX composite posted a reasonably decent gain in 2007 and the strategist at UBS expects more of the same in 2008. His 12-month target for the Toronto benchmark is 15,000. Mr. Vasic believes that commodity prices will ease from current levels but remain relatively high as global growth decelerates toward a more normal pace. He acknowledges that the sectors most directly affected by the U.S. slowdown and the strong Canadian dollar may take somewhat longer to recover, but look to be attractive turnaround prospects as the year progresses. He said the Canadian economy will be the main catalyst for the financials, consumer discretionary and staples, as well as telecom, all of which Mr. Vasic recommends overweighting.

He underweights energy and materials and is "neutral" on technology, staples and industrials.

Vincent Delisle - Scotia Capital Inc.

The director of portfolio strategy at Scotia Capital expects the S&P/TSX composite to rise to only 14,500 in 2008. But that will still allow stocks to beat out cash and bonds. His asset allocation model has stocks and cash at 5 per cent overweight and bonds 10 per cent underweight.

He sees U.S. economic growth slowing in the first half of the year. "A broader U.S. slowdown will certainly test the resilience of other economies and we believe it would be more accurate to cheer the era of desensitization to the U.S. rather than outright decoupling," he said in a recent outlook report. He sees the risks to economic growth looming larger than inflationary risks in the near term.

When it comes to sector strategy, he argues for a combination of defensive issues such as golds, utilities and consumer staples and early cyclical stocks such as financials and telecom. He also continues to favour the fertilizers.

Ben Joyce - BMO Nesbitt Burns Inc.

The portfolio strategist draws comparisons between the current situation in North American stock markets and those in 1998. He is persuaded that the current predicament is "more a crisis of confidence in the financial system, similar to 1998, than a prelude to a recession and a bear market." In 1998, North American stock markets plunged 20 to 25 per cent in three months and then staged an impressive recovery, he noted. "Because of the difficulties in sorting out the subprime securitization mess, the current correction is evolving as shallower, but more prolonged," he said in a report.

Mr. Joyce banks on interest rate cuts and strength in the emerging economies to limit the economic fallout from the credit crunch to a global slowdown rather than a recession.

He expects that Canadian corporate profits, as represented by the TSX composite members, as well as profits of the S&P 500 firms, will, after stalling in the third and fourth quarters of 2007, rise modestly in 2008 and 2009.

Mr. Joyce points out the market appears to be factoring a 15-per-cent decline in S&P/TSX profits over the next 12 months and a 25-per-cent decline for S&P 500 profits. He has one-year targets of 15,000 for the S&P/TSX composite and 1,650 for the S&P 500.

When it comes to S&P/TSX sectors, Mr. Joyce sees leadership rotating into selected cyclical sectors, but remains cautious on the bank.

Myles Zyblock - RBC Dominion Securities Inc.

The chief institutional strategist at RBC Dominion Securities Inc. cut his recommended exposure to stocks modestly at the beginning of December for both Canada and the U.S. out of concern about the near-term prospects, particularly in light of potential for further fireworks from the credit markets over the next quarter.

But his longer-term view is more optimistic. "While the current turbulence is probably not over, the longer-term outlook for North American equity markets is beginning to improve," he wrote in a market comment.

Mr. Zyblock also recently lowered his recommendation on Canadian financials to "underweight" from "market weight," saying he much prefers insurance issues. He also suggests a below-benchmark exposure to materials. At the same time, he raised the rating on energy issues to "market weight" from "underweight" saying that the opportunities reside mainly in the large-cap integrated space.

Nick Majendie - Canaccord Capital Inc.

The chief investment strategist at Canaccord is a relatively recent convert to the bullish camp.

He thinks North American markets could surprise on the upside, producing robust returns over the next 12 to 18 months.

For the S&P/TSX composite, he has a one-year target of 15,200, which he thinks may be conservative.

"The actions of the Fed [U.S. Federal Reserve Board], the shape of the yield curve and the best equity market valuations in 29 years in relation to bonds lead us to believe that the odds of a resumption of a healthy bull market over the next 12-18 months, if not longer, are high," he said.

"That is not to say that there will not be bumps along the road on the way upward as there are likely a number of financial problems yet to be revealed over the next few quarters," he said.

David Wolf - Merrill Lynch Canada

There is a bearish tone to the views of the economist and strategist for Merrill Lynch Canada on the Canadian stock market. He believes it will take until 2009 for the S&P/TSX composite to regain and sustain the highs set last summer.

He anticipates that profits, after rising by single digits in 2007, will actually decline modestly in 2008, before recovering in 2009. That, he expects, will put pressure on price/earnings multiples. But those negative influences on valuations will be offset, he expects, by gradually declining interest rates and the inflow of sovereign wealth funds.

Taken altogether, the factors suggest to Mr. Wolf that the Canadian market should be underweighted. Incorporating his profit projections into his forecast gives him a target of 13,300 for 2008 and 14,500 in 2009.

"After five years of feasting on double-digit returns, Canadian equity investors may have to endure a couple of years of famine," he warned.

Bob Gorman - TD Waterhouse

The chief portfolio strategist at TD Waterhouse says "the biggest question facing investors at the moment is whether the five-year-old global bull market will see a sixth year, or whether the subprime lending crisis will tip the U.S. into recession and cause a bear market."

But he feels positive about the situation. "There has been so much coverage of the subprime crisis that we believe it's already embedded in current market prices; therefore, other strong fundamentals, when combined with the stimulative effect on markets of the presidential cycle, will outweigh the subprime impact and keep the economy out of recession territory," he said.

He expects Canadian and U.S. equity markets will rise for a sixth consecutive year and generate single-digit returns.

However, in 2008, unlike the past few years, the impetus will not come from commodity prices, but rather from continued rotation into less cyclical sectors exemplified by major insurers such as Manulife Financial Corp., Power Financial Corp. and Sun Life Financial Inc.

Jeff Rubin - CIBC World Markets Inc.

The chief economist and strategist at CIBC World Markets Inc. admits that the subprime mess in the U.S. is proving to be a more protracted event than he first thought and has pruned his overweight position in equities, but that hasn't significantly blunted his optimism on the Canadian market in 2008.

He doesn't expect the subprime mess will lead to either a U.S. recession or an end to the five-year long bull market.

He expects the U.S. economy will slow for two quarters, and then economic growth will reaccelerate gradually, setting the stage for North American stocks to rally to new cyclical highs.
"That rally should see the TSX top 16,000 by the end of 2008," he said in a report.

The forecast of 16,200 for the S&P/TSX implies a year of double-digit gains, including dividends.

Mr. Rubin recommends a modest overweighting in consumer staples, an overweight in materials and energy and underweights in telecom, consumer discretionary, technology and industrials.

Subodh Kumar - Independent strategist

Mr. Kumar doesn't believe a bear is lurking in the Canadian stock market but he isn't as optimistic as some other market observers, either. He sees the S&P/TSX composite inching upward to 14,000 by year-end. But he expects it will be rough going for the first half of the year. After that, though, he anticipates more stable capital markets and a global recovery will provide support to the market. So too will a new profit cycle, which he sees after profits bottom out in the middle of 2008.

Mr. Kumar believes that the key consideration in stock picking in the first six months of the year will be quality of leadership and execution. "Recovery later is likely to be crucially linked with recovery in the financials," he said.

He recommends underweighting the Canadian consumer discretionary and manufacturing sectors because of the impact of the high-flying Canadian dollar and the uncertainty in key U.S. sectors such as housing and autos.

He favours well-positioned Canadian companies in health care, consumer staples, communications, energy distribution and the gold sector.

Clement Gignac and Pierre Lapointe - National Bank Financial

Mr. Gignac, chief economist and strategist at National Bank Financial, and Mr. Lapointe, assistant market strategist, hold one of the most bearish views of the Canadian market around, expecting that the S&P/TSX composite will slide from its current level to 12,800 over the next year. Given that target and the fact that they see the S&P 500-stock index losing some ground as well, it is little surprise that their asset allocation model has equities at just 40 per cent, while bonds are 45 per cent and cash 15 per cent.

But then, they note that the three interest rate reductions implemented by the U.S. Federal Reserve Board last fall have failed to trigger a stock market rally, unlike the situation following the 1998 Asian crisis.

Moreover, they attach a 50-per-cent probability to a recession in the United States and recessions, they point out, tend to be "very bad for the stock market."


Paul said...

REBGV inventory charts are up

solipsist said...

Everyone is an optimist it seems, but for those at NBF.

"They" must be putting something in the water. Then again, the pthalates from my bottled water may be affecting my own common sense.

Mark Fenger said...

I read an article recently by one of the guys who used to do that sort of economic prediction for a big investment company. He said he'd predicted one of the big drops ('80s I think) but his bosses wouldn't put it in the company report because if he was RIGHT the company gained very little and if he was wrong they looked like fools and lost a lot of money.

mohican said...

It has been said that bull markets climb a wall of worry and it is true. Crashes typically only come at the point of maximum optimism and I do not sense that at all in the North American stock markets.

Fundamental valuation metrics across North America are also quite reasonable and the current market is not in lofty P/E territory. That said I wouldn't expect double digit returns this year either but the main indexes should beat a savings account.

freako said...

Fundamental valuation metrics across North America are also quite reasonable and the current market is not in lofty P/E territory.

Well the problem is that the denominator in the P/E equation would get a haircut if the U.S. economy slows due to reduced consumer spending. One could almost say that there is a bubble in earnings.

mohican said...

You are correct freako and I would suggest that anyone looking at picking stocks right now should look for non-cyclical and non-consumer oriented companies. Companies who are focused on the US consumer will probably be hit quite hard. Especially stay away from companies whose earnings rely on discretionary consumption - Starbucks, Tiffany, etc.

Some suggestions are health care (Pfizer looks particularly good right now), Agriculture Products, Fertilizer and Equipment (Monsanto, Deere and Co), and consumer staples with a global marketplace (Kirin, Anheuser Busch or Altria would be good starts). Selected financial companies could be a very wise buy if you are able to handle the volatility.

Paul said...

Fraser Valley Stats are out. I look forward to your analysis!!