Bulk up on gold and silver stocks, cash as interest rates and inflation rise: CIBC World Markets
TORONTO, Aug. 8 /CNW/ - CIBC (CM: TSX; NYSE) - By this time next year, the cost of borrowing in Canada may be a full percentage point higher, and the recent easing in oil prices will be a distant memory, notes a new report from CIBC World Markets. "Investors are likely underestimating just how much (interest) rates will rise over the next 18 months," advise Peter Buchanan and Meny Grauman, senior economists, in the latest Canadian Portfolio Strategy Outlook. With U.S. inflation already at 17-year highs, policy makers in Canada and south of the border will be forced to "shift their focus from supporting growth to preventing a material spillover from energy and food to core inflation," say the two economists, who expect rate hikes to begin after the U.S. presidential election and carry through into 2009. Canadians though will see a smaller rate increase over the same period, says Mr. Buchanan, as signs increasingly point to a rapid slowing in the economy. Canada "will be in no rush to match" a forecast 200-point rise in U.S. interest rates, he says, but "above-target inflation will make it difficult for (Bank of Canada) Governor Carney to turn a completely blind eye to policy changes stateside." As for the recent 20 per cent drop in the price of West Texas Intermediate (WTI) crude oil, Mr. Buchanan says it's just a detour on the road to higher prices. "Driven by emerging markets, global demand is still advancing," he says, noting that oil consumption in the U.S. fell by 500,000 barrels per day in the first half of 2008 year-on-year but non-OECD demand grew nearly three times that, by 1.3 million barrels. "The past year's drop in crude demand is just a quarter of the reduction that will be needed over the next five years to free capacity to fill the gas tanks of millions of new motorists in places like China and India. That adjustment is unlikely to occur without even high crude prices." CIBC World Markets has updated its model investment portfolio based on how current market complexities are affecting Canada's main stock index, the S&P/TSX Composite. While an "overweight" position in the materials group is maintained, a percentage point has been shifted from base to precious metals to protect against rising inflation. "Gold bullion is a traditional inflation hedge, and our analysis indicates the same holds for Canadian gold and silver mining stocks," says Mr. Buchanan. "In the absence of a sizeable move up or down in the U.S. dollar, we expect changes in inflation to be the main force affecting bullion prices over the balance of 2008." CIBC World Markets has also taken a percentage point from its "underweight" position in bonds and added that to an already "overweight" position in cash. The shift is a defensive move against investors underestimating the potential for appreciable rate hikes in the coming year. "That makes us less enthusiastic about fixed income investments," says Mr. Buchanan. The model portfolio also maintains its previous "market-weight" position in equities, and long-standing "overweight" stance in energy. Mr. Buchanan also recommends underweighting the financials, industrials, telecom services and consumer discretionary sectors. A continuing tough operating environment will make it difficult for financial shares to hang onto all of their recent gains, he says. The skid in U.S. auto sales to 15-year lows in June points to difficult times for auto parts makers as well. While CIBC has maintained its previous targets for oil of US$125/bbl this year and US$150 in 2009, the firm has trimmed its target for natural gas to an average US$11/Mn Btu this year and $13 in 2009. Although rapid supply growth has dented gas recently, Mr. Buchanan notes the potential for firmer prices down the road as climate worries force more utilities to switch to the fuel from coal. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/psaug08.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.