“While we expect to see further distress in both the US housing market and the subprime mortgage market, there is little if any evidence of broad contagion effects in financial markets," says Jeff Rubin, chief strategist and chief economist at CIBC World Markets. "Corporate spreads remain tight by any historic benchmark while option volatility on the S&P 500 is only a fraction of that seen during last year's panic attack over the U.S. Federal Reserve’s tightening.”
       

        CIBC World Markets also expects that the US Fed will be prepared to cut interest rates to contain any contagion effects outside of the housing industry, particularly to offset any impact on consumer spending.
        Mr Rubin believes that the subprime mortgage shock is “unlikely to come even close to the Savings and Loan crisis of the late 1980s or the dot.com bubble collapse.

        He said: "Our projections assume that soaring delinquencies on subprime mortgages will eventually lead to a 30% default rate. We have assumed only a subsequent 50% recovery rate on defaulted loans, allowing for continuing declines in property prices. Even so, losses are unlikely to come in above $100 billion.”
        "The Savings and Loan crisis saw losses of $270 billion, with the losses in the Dot-Com collapse reaching $5 trillion, both in today’s dollars."
        The report notes that the TSX has already recuperated much of the ground lost in February’s angst over China and initial fears about the US sub-prime mortgage market. The US Federal Reserve's shift back to a neutral bias at its March meeting was enough to lift the TSX Composite back to within striking range of its early 2007 peak. Mr Rubin expects the TSX will exceed that in the next quarter.

        He remains 10 percentage-points overweight equities in his portfolio, and believes his TSX year-end target of 14,250 should yield a total return of nearly 13%.
        Mr Rubin remains 3.5 percentage points overweight in energy. He said that rising tensions with Iran, the upcoming Nigerian elections, and early weather warnings of a more active hurricane season in the Gulf of Mexico this year, should see crude prices rise steadily to top US$75 per barrel by the fourth quarter of this year.
        He expects base metal stocks to set new highs this year on the back of strengthening copper and nickel prices while gold shares look undervalued relative to bullish prospects for bullion.
        CIBC World Markets also remains overweight financial institutions and particularly banks. The report notes that Canadian banks continue to outpace their US counterparts and are well positioned to benefit from any second-half cuts in North American interest rates.

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