Canadian Equities Face ‘Real Risk’ of Correction, CIBC Says

Canadian equities face a “real risk” of a correction given the fiscal turmoil in Europe and weak corporate earnings, said Canadian Imperial Bank of Commerce’s chief portfolio strategist.

Peter Gibson, speaking today at the Bloomberg Canada Economic Summit in Toronto, said the correction could cut as much as 5 percent to 10 percent from stock market indexes in Canada and the U.S. and last as long as three months, Gibson said.

While the longer-term equities outlook is “favorable,” the renewed instability in Europe “suggests there’s a real risk of a correction,” said Gibson, who has been named Canada’s top quantitative analyst 21 times in annual Brendan Wood International surveys of money managers.

“It’s the low return on equity I’m really worried about,” he said.

Global stock markets fell for a second session today following the election of anti-austerity candidate Francois Hollande as French president and speculation that Greece’s next government will reject terms of its bailout. Equity gains have stalled in the past month, with Canada’s benchmark Standard & Poor’s/TSX Composite Index losing about 7 percent since April 1 on concern Europe’s debt troubles will limit economic growth.

Dennis Mitchell, a money manager at Sentry Investments Inc., warned against reading too much into the turmoil in Greece given the size of its economy.

Greek Effect

“Greece doesn’t drive our investment decisions,” Mitchell said during the panel discussion. “If everybody in Greece stopped drinking Coke or using computers, I think Coke and Microsoft would be fine.”

The S&P 500’s intraday decline to 1,347.75 today after trading as high as 1,422.38 this year indicates a deeper pullback and that the market is on the verge of a correction, Gibson said.

“When you look at corporate profitability in Europe, it’s extraordinarily weak; in Canada we’ve got some weakness in corporate profitability” because of cost pressures, he said. In the U.S., company profits are “about one-third of the strength we need to show there’s a self-sustaining recovery.”

To contact the reporters on this story: Hugo Miller in Orlando at hugomiller@bloomberg.net; Cecile Gutscher in London at cgutscher@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

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