CIBC says it will not have a major impact on global growth
Anne Howland
Sun
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 American 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 Thursday. “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 (LBO) 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.
“Buoyant global growth and the pick-up seen in Canada underpin our optimism on the equity outlook, driving earnings on both sides of the Canada-U.S. border to materially exceed the Street’s expectations in the second quarter,” said Shenfeld. “But unfortunately, over the last month investors have been throwing out babies with the U.S. mortgage bathwater.”
CIBC noted that private equity, which has fuelled 27 per cent of deal volume in the U.S. over the past two years, has not played as large a role in Europe or in Asia.
Buyout firms have been behind only 17 per cent of takeovers of Canadian companies since 2005, concentrated in the telecom and media sectors.
“Strip out the high-profile telecom deals, and private equity’s M&A share has been just seven per cent, a quarter of that stateside,” said the report. “Such LBOs have accounted for less than one per cent of mining acquisitions and just five per cent of deal volume in the energy patch.”
At the same time, corporate buyers, often other resource producers, have accounted for about 95 per cent of recent takeovers in Canada‘s resource sector.
© The Vancouver Sun 2007
