Stay in stocks, Rubin says

Recent market jitters will soon pass, allowing the S&P/TSX Composite to continue its trek toward 15,000 by the end of 2007, according to the monthly market update from one of Bay Street’s most vocal bulls.

“The global economic outlook has seldom been brighter, bringing strong support to energy and most commodity markets,” writes CIBC World Markets chief strategist Jeff Rubin. While the resource sector should get a boost, he expects that financial stocks will settle down as fears of a July interest rate hike have been sufficiently priced into the market.

“A summer hike from the Bank of Canada is unlikely to mark the beginning of a full-fledged tightening cycle, in view of the moderating impact of a rising Canadian dollar on both domestic growth and import prices.”

The TSX dropped about 200 points over the month of June, with IFIC partially blaming this performance on a downturn in fund sales.

Rubin’s team is trimming its exposure to the gold and utilities sectors by 0.5% each, in the Canadian Strategy Portfolio, investing the proceeds in industrial stocks. The portfolio maintains its 3.5% overweight position in energy and 2% overweight in non-gold mining stocks.

“Rising crude prices are likely to be the catalyst for renewed mergers and acquisition activity in Canada’s energy patch, particularly among those with extensive oil sands exposure,” Rubin writes, pointing out that the developing world demands ever-increasing quantities of oil.

Energy concerns are behind the increases in allocation to industrials, as fresh investment in that sector is focused on railways and transit equipment makers.

The largest underweight positions are in IT (2%) and consumer stocks — both discretionary and staples, at 1.5% each.

CIBC World Markets predicts that the TSX will deliver total returns of 18.1% by the end of the year, while in the U.S., the S&P 500 should offer up 13.2%. But Rubin remains bearish on the U.S. dollar, which could still drag unhedged returns lower.

The Federal Reserve is not expected to raise interest rates, as investors are already nervous about the final fallout in the sub-prime mortgage sector. Continued low interest rates could stave off thousands of foreclosures but will do little for the U.S. dollar in the near term.

Rising bond yields are widely seen as evidence that countries like China, which has a large reserve of U.S. Treasuries, are shifting assets out of fixed income and into equities. Given the Chinese appetite for resources, this too bodes well for the Canadian equity market.

On a year-to-date basis, Rubin’s Strategy Portfolio has earned 5.31%, slightly edging out its benchmark — a blend of the TSX Composite Total Return Index, S&P TSX Canadian Bond Index and one-month T-bills, which earned 4.85%.

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