Expect strong TSX earnings growth in 2008: CIBC

“Analysts have been lifting their expectations for earnings growth north of the border almost as aggressively as they have been wielding the knife stateside,” says Peter Buchanan, a senior economist and strategist at CIBC.

Buchanan does say that, due to the weak U.S. financial sector, TSX earnings will see only a 10% growth in the second quarter, but that will only be temporary.

“Traction in the TSX heavily-weighted energy and resources sectors, along with a gradually improving economy stateside, should see earnings growth snap back solidly to a near 30% pace in the second half of the year.”

If the TSX’s fortunes turn out the way CIBC predicts, 2008 growth numbers will actually exceed 2007’s 12% increase.

In terms of the companies on the TSX, Buchanan says the firms “appear to be holding up quite well despite pressure from sources like the high dollar — better in fact than margins south of the border.”

Over the last 25 years Canadian corporate profits have risen at an annual rate of 7%. That’s led some people to worry that we’ll see a major market correction sooner rather than later, much like we saw when the tech bubble burst.

Buchanan says comparing the dot-com run-up to the more recent stock market gains is like comparing apples to oranges.

“The gains of the dot-com era were driven by ‘concept’ companies, whose financial allure far surpassed their ability to deliver,” Buchanan explains. “The market’s recent run-up has, in contrast, been earnings-driven. While multiples have risen in step with stock prices, they are still not at overvalued levels. At just under 16, the TSX’s present forward multiple is still slightly on the cheap side, and nearly a third below its late 1990s peak.”

He adds that he doesn’t agree with those who say the upswing in resource prices is due to speculative pressures, and as a result are unsustainable.

That’s because the $4 trillion global oil market is so big, it’s an obstacle to market-moving speculation itself. “Inventories for oil and other commodities are also not ballooning, as might be expected if speculators were truly keeping prices radically above costs,” says Buchanan.

Besides TSX earnings, other signs point to strong growth for the Canadian economy. For one, there are record highs on the CRB index of commodities. This means that overseas economies haven’t been hit as hard by the U.S. downturn as many people thought. “This bodes well for the TSX, which has a nearly 50% resource cap weighting,” says Buchanan.

As well, while the earthquake in China was devastating, the reconstruction efforts might result in more commodity consumption as the country’s focus turns toward metal-intensive reconstruction.

Buchanan also explains that, as oil prices rise, earnings in the TSX oil and gas group do as well, by about $700 billion to $800 million per dollar per barrel.

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

(05/23/08)