Energy’s run isn’t over: Rubin

Despite Canada’s proximity to the economically troubled USA, there’s no need for Canucks to take a “defensive posture” when it comes to investing, says Jeff Rubin a chief economist at CIBC World Markets.

“There is more than sufficient momentum in both energy and materials stocks to warrant stock market exposure in the here and now,” says Rubin. He adds that even with talk of a recession south of the border, the economies of Canada and the U.S. have decoupled enough that we can invest more confidently than in previous months.

To prove his point Rubin explains that the gap between globally driven resource stocks and poor performing housing stocks “grows wider by the month.” He says the TSX is pulling far ahead of the S&P 500 and that “within the TSX, energy and financial stocks continue to head in the opposite directions. We are betting that those trends will persist.”

Because of the increasingly good prospects for the Canadian economy, Rubin raised his oil price forecast by $5 per barrel this year to an annual average of $100. He’s adjusted next year’s price to $110.

Rubin also says natural gas will hit $9.50 per million BTUs this year and $11 in 2009.

“Oil prices seem now firmly entrenched in triple-digit territory,” says Rubin. “[It’s] a level from which they are unlikely to retreat, and natural gas prices have rallied as strong utility demand has eaten into once-bloated U.S. storage levels.

“A tandem of $110 crude oil next year and $11 natural gas prices will support solid earnings gains while at the same time spurring increasing M&A activity in the sector,” he explains.

The economist is optimistic enough about the future of energy stocks to increase his “already overweight” position in the sector by 1%. But in order to do that he has to cut his stake in financials by 1%.

The move away from financials is based on worries about future declines in U.S. housing prices and the likelihood of increased mortgage default.

As for materials, Rubin remains overweight, specifically in base metals and gold components. “The U.S. economy has not contributed to demand growth for most major metals including aluminum, copper, zinc and nickel, while the Fed’s ultimate pursuit of a sub-2% federal funds rate will weaken the U.S. dollar and send gold prices to $1,100 per ounce,” he says.

He recommends an underweight position in the consumer discretionary and telecom sectors — both of which are underperforming the index — and in industrial stocks, which are “vulnerable both to Canadian dollar-related stresses and a further deterioration in broad U.S. economic conditions,” he says.

Bonds are another area where Rubin’s Strategy Portfolio is overweight. He expects a 75 basis point interest rate cut from the Bank of Canada as a response the Federal Reserve Board’s rate cuts and the hurting manufacturing sector.

With more positive news coming our way, Rubin says the S&P/TSX Composite will hit 14,500 by the end of the year, and 16,200 by the end of 2009.

Filed by Bryan Borzykowski, Advisor.ca, Bryan.Borzykowski@advisor.rogers.com

(03/05/08)