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ECONOMY: CIBC predicts interest rates to rebound, resource stocks to climb
        (AlbertaIndex, May 8, Thursday) --- After months of decline, interest rates will rebound and lift energy and materials stocks to new record highs, predicts CIBC World Markets in a new report.         It said interest rates will rise at least 100 basis points by the end of next year on “unrelenting pressure” from skyrocketing food and energy prices.

“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,” said Jeff Rubin, chief strategist and chief economist at CIBC World Markets.

Because rising interest rates make bond yields less attractive, Mr Rubin is paring back the bond weighting in his model portfolio to “neutral” from “overweight”.

That frees up funds to take a slightly overweight stance in equities, with emphasis on energy and materials stocks.

Mr Rubin’s increased weighting in energy stocks reflects supply struggles and surging demand that he predicts will push oil to US$130 a barrel and natural gas to US$13 per milion BTUs in 2009.

“We remain wary of near-term market volatility. But the strength of the resource market, particularly energy, and a gradual recovery in the US economy should see the TSX justify our equity weighting,” said Mr Rubin.

CIBC’s ‘overweight’ stance in materials is tied to the strength of emerging markets where infrastructure developments are driving demand for metals and other resources, and rising income levels and meat consumption are pushing up global agricultural prices.

“An expected return to a global supply deficit in 2009 has led us to upgrade our forecast for copper prices,” said Mr Rubin.

“In comparison to the other metals, the golds haven’t shone of late. But the pullback there should prove temporary, given the prospect for further dollar weakness and continuing inflation jitters, fuelled by rising oil and food prices.

“Agricultural commodity and chemical producers, along with purveyors of needed infrastructure or crop improvements like irrigation and biotech firms offer the greatest potential positive leverage to global food supply troubles. Profits in the agricultural chemicals sector are expected to nearly triple this year.”

While those sectors are winners, Mr. Rubin says companies that “rely heavily on grain, oil, or other commodities as inputs face increasing costs and thus weaker profits.”

As a result, he has cut a half percentage point of weighting in the consumer staples group, which includes both food retailers and processors.

He has also shed weight in the utilities sectors where dividend yields are likely to prove less attractive in a rising interest rate environment.

“In addition, rising carbon abatement costs could also reduce future profit growth, especially for coal-dependent power generators.”

Mr Rubin’s end of 2009 forecast of 16,200 for the TSX, versus 1,475 for the S&P 500, points to the globally leveraged Canadian market continuing to outperform the S&P 500 for at least another year, aided by continuing strength in energy and materials stocks.

“We now expect TSX earnings to rise by an above-trend 16% this year. That should easily surpass the consensus estimate of a 10% rise in S&P 500 earnings, marking the fourth consecutive year of better earnings growth north of the border.

“Beyond the positive effect of triple-digit crude, US$4 per lb copper and US$1,000 per tonne potash on the energy and materials groups, profit expectations have also been upgraded for info tech and more modestly for key industrial producers like the rails.

“Alternatively, financial sector earnings are expected to fall modestly for the first time since 2002. That compares with expectations just three months ago for a near-double-digit gain for the sector.”

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