“The combination of 1 per cent real GDP growth, over-4 per cent inflation, and some 200 basis points of Federal Reserve board tightening will be challenging to large swaths of the stock market, particularly anything connected to the energy-exposed transport sector,” the firm's chief strategist Jeff Rubin said Monday in a monthly portfolio strategy commentary.
As a result, having raised the firm's 2008 goal for Canada's benchmark equity index by 700 points to 15,200 at the beginning of June based on soaring oil prices, he now is forecasting a year-end tally of just 14,300.
Mr. Rubin also has taken an axe to his forecast for 2009, cutting it back to 15,250 points from 16,200.
In addition, he said he has cut back the firm's Canadian portfolio equity weighting by four percentage points, even though upgrades to its oil and gas price forecasts “make us even more bullish on our hugely overweight position in energy stocks.”
In fact, with the TSX energy index up nearly 20 per cent so far this year – even though the shares of major global integrated oil companies have stagnated or fallen – CIBC has added another half-point of weighting to its position in the sector, taking it to 7.5 per cent.
With West Texas Intermediate crude already topping $140 (U.S.) a barrel, the firm is now expecting an average price of $150 next year and $200 in 2010.
Mr. Rubin also has added half a percentage point of portfolio weight to the agricultural chemical sub-sector of the materials sector in the S&P/TSX composite, taking it to 7 per cent and materials as a whole to 23.1 per cent of the portfolio.
“Soaring demand for higher protein diets in China and India is lifting agricultural prices round the world and sending world fertilizer demand through the roof,” he said. “The ill-conceived diversion of America's corn crop to ethanol production is only adding further fuel to already heated global fertilizer demand.”
Even though fertilizer company shares have soared in the past year, the lack of sizable new production capacity to date means there is likely still “headroom” for further gains, he said.
By contrast, CIBC has reduced its weighting in consumer discretionary stocks to 0.5 per cent from 1 per cent, saying the auto component looks “particularly vulnerable,” as well as chopping industrials, particularly airlines, by the same amount to 2.4 per cent.
“Triple-digit oil prices portend soaring losses throughout the North American, and indeed, the world aviation industry,” he said.
As for Canadian financial services stocks, Mr. Rubin said it is still too early to wade back into the sector.
“The financial group was among the TSX's weakest performers in June, as an earlier rally fell flat,” he said. “While the sector has not been setting new lows for the year, as it has in the U.S., we believe that downside risks will continue to exceed potential upside for some time further.”
As a result, CIBC is keeping the sector weighting at 22.5 per cent in its portfolio, 2.5 points below the S&P/TSX composite benchmark.
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