Canadian Business Wire

For those concerned about the potential impacts arising from the U.S. housing and subprime mortgage market and how that will affect Canadian markets can rest a little easier today. The CIBC World Markets' latest Canadian Portfolio Strategy Outlook report finds that the rise in global energy and base metal prices will outweigh any negative impact felt by the $100 billion meltdown in U.S. subprime mortgage markets.

The TSX rises and falls more on the impact of global growth due to its resource and energy base. The continued increases in energy and metal prices have thus far improved the overall outlook for the TSX. Further good news comes as the subprime market represents less than five per cent of new mortgages in Canada but over 20 per cent in the U.S.

Chief Strategist and Chief Economist at CIBC World Markets Jeff Rubin says, "While we expect to see further distress in both the U.S. housing market and the subprime mortgage market, there is little if any evidence of broad contagion effects in financial 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."

"Together with soaring uranium prices and firming natural gas prices, the return of US$70 per barrel oil will catapult the TSX energy sector to new highs," notes Mr. Rubin. "Buoyed by its reliance on global resources and with less exposure to the sub-prime mortgage market, we expect the TSX to outperform the S&P 500 this year."

Compared to past meltdowns in the markets, Jeff Rubin finds 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. Our projections assume that soaring delinquencies on subprime mortgages will eventually lead to a 30 per cent default rate. We have assumed only a subsequent 50 per cent recovery rate on defaulted loans, allowing for continuing declines in property prices. Even so, losses are unlikely to come in above $100 billion." Adjusted for today's dollars, the Savings and Loan crisis saw losses of $270 billion, while the losses in the Dot-Com collapse reached $5 trillion.