Despite recent downturns, equity markets on both sides of the
border expected to deliver modest returns in the coming
year
TORONTO, Oct. 8, 2015 /CNW/ - While slow global economic
growth will continue to drag on performance, now is not the time to
bail on equities, finds a new report from CIBC World Markets.
Following the worst quarter in years, both the Canadian and U.S.
equity markets will deliver overall modest but positive real
returns. A modest improvement in commodity prices, marginally
better overall GDP growth and the benefits of a weaker Canadian
dollar on foreign earnings will drive the Canadian lift.
"Our top-down earnings model, which looks at indicators like
economic growth and resource prices, points to 10 per cent growth
in earnings for the TSX in the next four quarters," says
Avery Shenfeld, Chief Economist at
CIBC, in a report co-authored with Economist Nick Exarhos. "While slow economic growth may
indicate middling equity market performance, now is not the time to
sell given that alternative cash and bond yields are so abysmally
low."
While promising compared to declines in the last four quarters,
the 10 per cent growth outlined in the report trails the 20-30 per
cent analyst consensus. Mr. Shenfeld believes this is largely
because equity analysts are still in the process of moving their
oil price expectations down to what investors are already
assuming.
"On a forward PE basis, Canadian non-resource stocks are now at
historically cheap levels relative to comparable stocks on the
S&P 500, which suggests these could outperform those in the
U.S. in coming quarters," adds Mr. Shenfeld.
For U.S. equities, a cyclical adjusted price-to-earnings (CAPE)
ratio is consistent with a 5 per cent annual nominal return in the
decade ahead, with the report's other benchmarks also spelling
mediocre rather than negative returns ahead for equities.
Mr. Shenfeld also believes that companies may find it attractive
to issue debt and do share buy-backs given low bond yields relative
to earnings yields, also supporting equities.
"As both Canadian and U.S. equity markets will overall
experience modest but positive real returns, the news has me
shouting two cheers for equities," concludes Mr. Shenfeld.
The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/eioct15.pdf
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SOURCE CIBC World Markets