Toronto Stock Exchange Target Cut to 12,500 - UBS

The economics team at UBS recently called for the most severe global recession since 1981-1982. This prompted strategist George Vasic to warn that Canada would not be spared despite the country’s strong underpinnings.

Along with lower estimates for non-resource sectors, UBS also made widespread cuts to its commodity price forecasts, bringing oil down to US$60 per barrel and gold to US$700 per ounce in 2009.

These reductions led to a 21% reduction for Mr. Vasic’s 2009 S&P/TSX composite index earnings estimate (from C$1151 to C$909), which implies that the benchmark index is trading at a forward price-to-earnings multiple of just above 10 times. As a result, he cut his TSX target to 12,500 from 13,500, which continues to assume corporate bond yields remain elevated.

Mr. Vasic told clients that what this says about resource stocks is that their earnings don’t drop as much as expected due to the lower Canadian dollar, and energy and materials valuations are in line, not cheaper than the broader market. A sharply lower loonie cushions the blow to resource earnings, but non-resource earnings growth of 6% appears to be vulnerable given the anticipated recession, he said.