Forget the June jitters.
The stock market rally will resume in earnest in the second-half of this year, fuelled by continued strength in the global energy and commodity sectors and unusually favourable economic conditions around the world, a leading Bay Street economist contends.
“While a final verdict on the [U.S.] sub-prime [lending] market won't be known for quarters, the global economic outlook has seldom been brighter, bringing strong support to energy and most commodity markets,” Jeff Rubin, chief economist and strategist at Canadian Imperial Bank of Commerce, said Thursday in a monthly update of the bank's Canadian portfolio strategy outlook.
An expected interest-rate hike by the Bank of Canada is unlikely to signal the start of a “full-fledged tightening cycle,” Mr. Rubin argues, because of the “moderating impact” of the climbing Canadian dollar on both domestic growth and the price of imported goods.
Add it all up, and the bank is maintaining its asset mix at 68 per cent equities, 29 per cent bonds and 3 per cent cash, unchanged from last month. In early May, Mr. Rubin boosted his 2007 target for the S&P/TSX composite index to 15,000 points from 14,250.
Although it has tweaked several sector components in its portfolio, CIBC also is keeping its energy sector weighting at 31.4 per cent, 3.4 percentage points higher than that in the benchmark S&P/TSX composite index, as soaring demand for oil from the developing world has helped push the price of crude to over $70 (U.S.) a barrel.
This is “likely to be a catalyst for renewed mergers and acquisitions activity in Canada's energy patch, particularly among those [companies] with extensive oil sands exposure,” Mr. Rubin said, adding that he figures crude prices are “en route to record highs this year.”
The bank also figures uranium prices will resume their rise following a small recent dip, the first decline in almost four years, arguing that the forces behind the recent bull market in the fissile metal remain intact.
“Given the . . . small share (10 per cent or so) of natural uranium prices in overall reactor operating costs, prices would have to rise far above today's $135 (U.S.) a pound to threaten nuclear's cost advantage over competitors such as coal, once carbon emissions are priced,” he said in the strategy update. “Uranium remains our top pick within the energy space as we see nuclear power slated to replace coal-fired power in an increasingly emission-conscious world.”
However, Mr. Rubin has boosted the bank's weighting in the industrial sector by one percentage point, to 4.6 per cent – it remains one point below the benchmark – to reflect the gains flowing to such areas as railways and transit equipment from ever higher energy prices and concerns about greenhouse gas emissions.
“Rail is nine times more fuel-efficient than its main freight competitor, trucking and hence is a source of much less GHG emissions,” he said.
By contrast, he also has reduced CIBC's weighting in both utilities and gold stocks by about half a percentage point, to 1.4 per cent and 5.7 per cent, respectively.
This is because utilities' heavy use of coal leaves them vulnerable to pending restrictions on carbon emissions, while the bank is “less convinced” than it was that rising bullion prices will translate into higher gold stock valuations.
“Gold stocks have been a disappointment, despite bullion's $40-an-ounce rise since mid-January,” Mr. Rubin said. “Investors have been reluctant to pay the same multiples as in the past, as rising costs flatten earnings growth.”
As well, investor interest has been “siphoned off” — and will likely continue to be — by the strength of base metals and the availability of new investment vehicles such as gold exchange-traded funds.
