Canadian stocks will gain 19 percent next year should European leaders spend as much as 2 trillion euros ($2.6 trillion) to solve the region’s debt crisis, says Peter Gibson, the Canadian Imperial Bank of Commerce strategist.
The Standard & Poor’s/TSX Composite Index may climb to 14,000 from yesterday’s close of 11,716.88, provided that world leaders spend enough money to reassure investors. Failure to do so may lead to a new financial crisis, a breakup of the euro region and a recession in the U.S., said Gibson, who has been named Canada’s top quantitative analyst 21 times in annual Brendan Wood International surveys of money managers.
“We continue to believe that Europe is ultimately going to do what they have to do,” Gibson, 54, said in a telephone interview from Toronto. “If Europe does the right thing, you’ve got a shot at a two- or three-year recovery. If Europe fails to act, it’s Armageddon.”
Canada’s benchmark stock index fell 13 percent this year through yesterday, led by raw-materials and energy stocks, on concern Europe’s debt troubles will limit economic growth. The two industries make up 48 percent of Canadian equities by market value, according to data compiled by Bloomberg. Gibson estimates there is about a 70 percent chance 2012 will see a resolution of the European debt situation and a delay in what he sees as an inevitable real estate and banking crisis in China.
It will take the infusion of 750 billion euros to 1 trillion euros into German and French banks and another 1 trillion euros for economies in the European periphery for the crisis to subside, according to Gibson, who said in 2004 the euro might face a breakdown by 2010.
“It has to be a big and overwhelming strategy,” said Gibson, whose bank is Canada’s fifth-largest by assets.
Italian government-bond yields below 4 percent would indicate market acceptance of a debt-crisis solution, Gibson said. Ten-year Italian debt yielded 6.61 percent yesterday. The yield was last below 4 percent in November 2010.
Should that scenario occur, energy and materials companies, which are sensitive to economic growth, will outperform after lagging behind more-defensive stocks in 2011, Gibson said. Smaller equities would also rally after the S&P/TSX Smallcap Index tumbled 19 percent this year through yesterday.
As energy and materials companies’ share of Canadian stocks is almost three times their proportion of U.S. stocks by market value, Canadian equities would outgain their U.S. counterparts, Gibson said. CIBC’s Investment Strategy Committee forecasts the S&P 500 will advance to 1,260 next year, which would mark a 1.5 percent increase from yesterday’s close.
“If the right thing is done, oil probably rebounds to over $100 a barrel,” Gibson said. “You would expect the Canadian dollar would be back above parity. You would expect the TSX to outperform.”
The CIBC strategy committee recommends investors have most of their holdings in equities. Its model portfolio for more-risk-tolerant investors has 65 percent of its holdings in Canadian stocks and none in U.S. equities. The committee’s 2012 estimate for the S&P/TSX is 13,000.
Gibson agreed a case could be made for investors to hesitate, considering the 30 percent chance the S&P/TSX could face a plunge like that of the bear market from June 2008 to March 2009, when it slumped 50 percent.
“The two outcomes in front of us are very, very different,” he said. “It’s just a classic binary decision.”