U.S. fears ‘unwarranted’
Anne Howland
Province
A vacant house is for sale in Denver, Colo.’s Green Valley Ranch neighborhood, an area hard hit with foreclosures. Photograph by : Reuters
OTTAWA — Canadian investors have been “throwing out babies with the U.S.-mortgage bathwater,” says a new report from CIBC World Markets’ senior economist Avery Shenfeld.
According to Shenfeld, recent losses on the Toronto Stock Exchange are being driven by “unwarranted fears” that current troubles in the U.S. subprime market would have a major impact on global growth.
Negativity has reigned on the TSX since mid-July, when takeovers and takeover speculation propelled the index to a record high of 14,646.82. Since then, it has lost almost seven per cent, as investors question the stability of lending markets that finance these acquisitions.
“Investors followed a circuitous route to link U.S. mortgages to Canadian equities over the past month,” said Shenfeld in a report released yesterday.
“Losses on subprime mortgages put some hedge funds at risk, which raised concerns about Wall Street’s liquidity. This led to widening spreads on high-yield bonds and loans, which left dealers stuck with loans on leveraged buyout deals in process.
“This added to the risks to lending liquidity and pressured investment grade spreads, which raised concerns over global growth,” he said, and led to “a broad-based drop in Canadian equities.”
The U.S. mortgage market has been plagued with rising delinquency and default rates in the subprime — or riskiest — segment of the market, causing some lenders and fixed-income investors to shy away from higher-risk debt in general.
Shenfeld pointed to a “missing link” between these problems in the U.S. mortgage market and corporate credit quality globally, especially since corporate defaults and debt burdens outside the realm of leveraged buyouts are low.
Also, economic growth and corporate earnings are strong, Shenfeld said, citing Canadian earnings that are on track for a 16-per-cent gain this year and another double-digit gain in 2008.
