Sky’s the limit for TSX: Rubin

(May 5, 2008) Investors can count on the Bank of Canada not only ending its easing cycle, but boosting interest rates by up to 100 basis points by the end of the year, according to Jeff Rubin, chief strategist and chief economist at CIBC World Markets.

“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,” Rubin said in his monthly Strategy Outlook report.

The coming rate hikes will be the Bank’s response to “unrelenting pressure” driving the price of food and energy higher. With that trend as a backdrop, Rubin recommends higher exposure to the energy and materials sectors of the Canadian equity markets.

Rubin has adjusted the fixed income portion of his model portfolio’s allocation to free up the cash to invest in materials, moving bonds from an overweight position to neutral. That means a 38% allocation to bonds, with equities making up 55% of the portfolio. The cash allocation falls to 7%.

Rubin remains overweighted in the energy sector, which makes up 37% of the portfolio’s equity position, seven percentage points higher than the benchmark. The addition of 1% to the energy exposure comes at the expense of the utility sector, which Rubin cuts from 3.5% to 2.5% of the equity portfolio.

“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 Rubin.

He also predicts that the profits for companies producing agricultural chemicals will triple this year, which justifies a 0.5% increase in the allocation to the chemical sub-sector within materials.

Rubin predicts that the S&P/TSX Composite index will reach 16,200 by the end of 2009, a gain of about 13% from today. Meanwhile, the S&P 500 will struggle to reach 1475 over the same period, which would mark a gain of about 5%.

If there is a dark spot on the Canadian stock markets, Rubin says it is the financial sector, where profits are expected to “fall modestly for the first time since 2002.” The model portfolio remains 2.5% underweighted in financials, with a 25.7% allocation.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com