UBS Optimistic About S&Ps in 2009 - On Both Sides of the Border

With the S&P/TSX Composite down 40% year-to-date and hovering around 8300 points on Wednesday, it's hard to imagine Canada's top exchange rising 50% to 12,500 by the end of next year.

According to UBS strategist George Vasic, however, that's exactly what Canadian investors have to look forward too in 2009.

"Our TSX target of 12,500 reflects an improvement in valuations that can overcome the downdraft from earnings estimates," he said in a note to clients.

Mr. Vasic's optimism is buoyed by the Composite's low price-to-book value ration and the markets shifting focus in 2009 towards prospects for 2010, which should include improved growth and some recovery in commodity prices.

He told clients that 2009 is still loaded with significant uncertainty and said his forecast hinges on how quickly monetary and fiscal intervention already in motion can improve credit market conditions.

Mr. Vasic wrote:

Upside surprises include a return to more normal financial market conditions, which will help stabilize the global economies and resource prices. Potential downside surprises include a protracted thawing in credit markets leading to a further downturn.

The strategist named Bank of Nova Scotia (BNS), Canadian Pacific Railway Ltd. (CP), EnCana Corp. (ECA), Potash Corp. of Saskatchewan Inc. (POT), Rogers Communications Inc. (RCI), Toronto-Dominion Bank (TD), Tim Hortons Inc. (THI) and TransCanada Corp. (TRP) as his "eight preferred stocks" to buy.

Mr. Vasic's UBS counterpart in the U.S., is just as bullish on the prospects for the S&P 500 next year. Strategist David Bianco's year-end S&P target is 1300, which represents a 50%.

Mr. Bianco said he taking comfort in the fact that policy maker around the world are working hard to restore confidence in the markets.

Once this happens, powerful positive underlying economic forces such as the worldwide proliferation of technology and globalization should make confidence shine again.

He said the steep declines experienced on U.S. markets over the past few months are an opportunity to buy big-cap growth stocks at deep discounts. He listed a basket of stocks he calls the "Sweet 35," as good bets for investors. Included in the 35 names are General Electric Capital Co. (GE), and Procter & Gamble Co. (PG).

Mr. Bianco wrote:

Their world class assets, backed by strong balance sheets, are enviably positioned to benefit from global growth. These stocks will be sought after when capital returns from the sidelines.

Comments

[MarvinMBA:]

GE which is primed for a green technology like nuclear and clean wind, solar and clean carbon technology will make the future in spades...MarvinMBA

2008 Dec 04 12:24 AM

[einstein p ...:]

Bought some at 13.50. Never thought I'd see that price. Great yield, solid company. Don't expect anything near term from the stock, but the yield seems safe and it is paying you to wait.

2008 Dec 05 10:00 AM

[Fred Voetsch:]

Unfortunately these "expert analysts" can't see farther back than the past few decades and will be the cause of many people losing most of what they have left.

The CURRENT PE ratio of the S&P 500 is in the high teens versus the historic average of 14. Book value is also higher than the historic average by about the same percentage and if one looks at the long term trend of the stock market one sees that we are still above "fair value". IN a secular bear market we should expect the market to drop significantly below fair value (somewhere around 6,000 on the DJIA) in compensation for the excesses built into the market over the past several decades.

As well, we have a terrible looking demographic change with the baby boomers moving into their retirement years. They will be taking more and more out of the market, generating less and less income and expecting more and more from the government.

The Dow should easily drop to the 3,000 range and I expect it to stay well below its fair value for a decade or two.

--Fred Voetsch

2008 Dec 05 11:37 AM