TORONTO, May 5 /CNW/ - CIBC (CM: TSX; NYSE) - "Unrelenting pressure" on
food and energy prices will reverse the direction of interest rates in the
next 12 months, and lift energy and materials stocks to new record highs,
notes a CIBC World Markets report.
    "While the bank of Canada may still have one more (rate) cut up its
sleeve, markets will be surprised at how rapidly the Bank is compelled to take
back those easings," says Jeff Rubin, Chief Strategist and Chief Economist at
CIBC World Markets in his monthly Canadian Portfolio Strategy Outlook report.
"We expect to see at least 100 basis points of tightening" by the end of next
year.
    Because rising interest rates make bond yields less attractive, Mr. Rubin
is paring back the bond weighting in his model portfolio to "neutral" from
"overweight". That frees up funds to take a slightly overweight stance in
equities, with emphasis on energy and materials stocks.
    Mr. Rubin's increased weighting in energy stocks reflects supply
struggles and surging demand that he predicts will push oil to US$130 a barrel
and natural gas to US$13 per Mn BTUs in 2009.
    "We remain wary of near-term market volatility. But the strength of the
resource market, particularly energy, and a gradual recovery in the U.S.
economy should see the TSX justify our equity weighting," says Mr. Rubin.
    Mr. Rubin's "overweight" stance in materials is tied to the strength of
emerging markets where infrastructure developments are driving demand for
metals and other resources, and rising income levels and meat consumption are
pushing up global agricultural prices.
    "An expected return to a global supply deficit in 2009 has led us to
upgrade our forecast for copper prices," says Mr. Rubin. "In comparison to the
other metals, the golds haven't shone of late. But the pullback there should
prove temporary, given the prospect for further dollar weakness and continuing
inflation jitters, fuelled by rising oil and food prices.
    "Agricultural commodity and chemical producers, along with purveyors of
needed infrastructure or crop improvements like irrigation and biotech firms
offer the greatest potential positive leverage to global food supply troubles.
Profits in the agricultural chemicals sector are expected to nearly triple
this year."
    While those sectors are winners, Mr. Rubin says companies that "rely
heavily on grain, oil, or other commodities as inputs face increasing costs
and thus weaker profits." As a result, he has cut a half percentage point of
weighting in the consumer staples group, which includes both food retailers
and processors.
    He has also shed weight in the utilities sectors where dividend yields
are likely to prove less attractive in a rising interest rate environment. "In
addition, rising carbon abatement costs could also reduce future profit
growth, especially for coal-dependent power generators."
    Mr. Rubin's end of 2009 forecast of 16,200 for the TSX, versus 1,475 for
the S&P 500, points to the globally leveraged Canadian market continuing to
outperform the S&P 500 for at least another year, aided by continuing strength
in energy and materials stocks.
    "We now expect TSX earnings to rise by an above-trend 16 per cent this
year. That should easily surpass the consensus estimate of a 10 per cent rise
in S&P 500 earnings, marking the fourth consecutive year of better earnings
growth north of the border.
    "Beyond the positive effect of triple-digit crude, US$4/lb copper and
US$1,000/tonne potash on the energy and materials groups, profit expectations
have also been upgraded for info tech and more modestly for key industrial
producers like the rails. Alternatively, financial sector earnings are
expected to fall modestly for the first time since 2002. That compares with
expectations just three months ago for a near-double-digit gain for the
sector.
    The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/psmay08.pdf

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