Energy, materials stocks warrant market exposure: CIBC World Markets
Decoupling from U.S. economy evident in momentum of resources sector TORONTO, March 5 /CNW/ - CIBC (CM: TSX; NYSE) - Whether the U.S. economy is in recession or not, there is enough evidence of market decoupling that Canadian investors need not take an entirely defensive posture, notes a new CIBC World Markets report. "There is more than sufficient momentum in both energy and materials stocks to warrant stock market exposure in the here and now," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets in his monthly Canadian Portfolio Strategy Outlook report. "The chasm between globally driven resource stocks and housing-tainted financial stocks grows wider by the month," he notes, pointing to the energy-laden TSX pulling well ahead of the S&P 500. "Within the TSX, energy and financial stocks continue to head in opposite directions. We are betting that those trends will persist." As a result, Mr. Rubin is raising his oil price forecast by US$5 per barrel this year to an annual average of US$100, and next year's prices to US$110. And perhaps more important, he says, is natural gas which he forecasts to hit US$9.50 per Mn BTUs this year and US$11 next year. "Oil prices seem now firmly entrenched in triple-digit territory, a level from which they are unlikely to retreat, and natural gas prices have rallied as strong utility demand has eaten into once-bloated U.S. storage levels. A tandem of US$110 crude oil next year and US$11 natural gas prices will support solid earnings gains while at the same time spurring increasing M&A activity in the sector," says Mr. Rubin. Mr. Rubin's optimism is reflected in a one percentage point weighting increase in his model portfolio's already "overweight" position in energy stocks. That increase is funded by an equal cut in financials, split evenly between banks and non-banks. The move out of financials follows further declines in U.S. housing prices, and likely increases in mortgage default rates. Consistent with his "global versus U.S. strategy," Mr. Rubin remains "overweight" in materials stocks, including the base metals and gold components. "The U.S. economy has not contributed to demand growth for most major metals including aluminum, copper, zinc and nickel, while the Fed's ultimate pursuit of a sub-2 per cent federal funds rate will weaken the U.S. dollar and send gold prices to US$1,100 per ounce." Mr. Rubin's portfolio remains "underweight" in both the consumer discretionary and telecom sectors, both of which are underperforming the broad index. Also "underweight" are industrial stocks, which he says are "vulnerable both to Canadian dollar-related stresses and a further deterioration in broad US economic conditions, although rail stocks will benefit to some extent from their high levels of efficiency against other forms of transport in a world of triple digit oil prices." He remains "overweight" in bonds, expecting another 75 basis point interest rate cut from the Bank of Canada in response to the U.S. Federal Reserve Board's recent rate cuts and a visibly weakening Canadian manufacturing sector. While the cash weighting in his benchmark has risen this month at the expense of stocks, he continues to be underweight cash in his portfolio. Mr. Rubin has a year-end target of 14,500 for the TSX Composite that builds in some sideways, or possibly even modest down movements in the market over the next quarter. His longer term TSX target of 16,200 for year-end 2009 anticipates a stabilization of the U.S. housing market by the first quarter of next year. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/psmar08.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