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.

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