Filling up on energy stocks may offset pinch at the pumps: CIBC World Markets
TORONTO, April 2 /CNW/ - CIBC (CM: TSX; NYSE) - The impact of US$100 oil is being felt at the pumps but it isn't trickling down to the price of energy stocks, and that signals a hidden opportunity for investors, notes a new CIBC World Markets report. "The TSX oil and gas index should be trading about 35 per cent above current levels," estimates Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets in his monthly Canadian Portfolio Strategy Outlook report. But instead, energy stock valuations appear to embed oil prices 25 per cent below the US$100 per barrel price he expects oil to average over the rest of the year. "While the energy index tracked crude's rise closely to US$75, it has priced in little of the increase since," says Mr. Rubin. Also contributing to the gap he sees in the index has been the low price of natural gas which has in turn restrained valuations. But he doesn't expect that to continue as gas-fired power generation plants take the place of cancelled coal-fired plants. "Surging utility demand will soon push North American natural gas prices into the double-digit range," says Mr. Rubin. These factors are bolstering Mr. Rubin's view that the energy and materials-rich TSX is positioned to significantly outperform the U.S. market and offer greater diversification for investors. "Since the beginning of the decade, TSX total returns have been seven per cent better than that of the S&P 500 per year," says Mr. Rubin, adding that the continued outperformance seen in the first quarter should hold for the balance of the year and 2009. "And while stock market returns around the world are becoming increasingly correlated, TSX returns bucked the trend by diverging markedly from global performance," he says. "In a sharp reversal from the past, a dollar invested in the Canadian market now offers greater opportunity for diversification for investors with sizeable U.S. dollar exposure than a matching amount placed in European and Asian stocks. "Two-thirds of the TSX's superior total return performance over the S&P 500 over last year was due to the outperformance of various Canadian sectors over their U.S. market counterparts. This is particularly true for energy and material stocks, which since the beginning of the year have played decisive roles in the better overall performance of the Canadian markets." Mr. Rubin's model portfolio continues to be heavily "overweight" in these sectors. And this month, he is shifting more funds into energy. That increase is funded by a one per cent cut in telecoms, where he remains "underweight" due to slowing revenue growth and a softer global M&A environment. Mr. Rubin also remains "overweight" in the materials sector which has been the TSX's leading performer in 2008. He predicts prices for a range of non-energy commodities will be firm in 2008 as supplies remain stretched for many minerals and industrial metal. He also believes gold's recent retreat will prove temporary given a continuing weak greenback, inflationary jitters and further anticipated U.S. Federal Reserve rate cuts. He remains "overweight" in bonds as well, expecting another 75 basis-point interest rate cut from the Bank of Canada and a 100 basis-point rate cut from the U.S. Federal Reserve Board. Mr. Rubin continues to be underweight cash in his portfolio. He continues to hold an "underweight" stance in financials anticipating further asset write downs from the U.S. subprime mortgage market. Mr. Rubin has a year-end target of 14,500 for the TSX and 16,200 for year-end 2009. This reflects his expectation that the TSX will continue to outperform the S&P 500 with returns of 7.7 per cent this year and 14.1 per cent in 2009. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/psapr08.pdf. CIBC World Markets is the wholesale and corporate banking arm of CIBC, providing a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.
For further information:
For further information: Jeff Rubin, Chief Economist and Chief Strategist, Managing Director, CIBC World Markets at (416) 594-7357; or Tom Wallis, Communications and Public Affairs at (416) 980-4048, firstname.lastname@example.org