CIBC World Markets’ economics and strategy team is shifting from a stance favouring bonds and cash to a balanced portfolio.

“The bond market has gone a long way towards pricing in our tame outlook for North American growth and inflation. So much so, that with the risks of an excessive bond market reaction to even a modest improvement in US GDP and employment figures, we are cutting our earlier overweight positions in bonds and cash back to benchmark,” the firm says in its Canadian Portfolio Strategy Outlook for September.

In paring back its asset allocation from the income side, CIBC is upping its allocation to stocks. “Though we still see hurdles for equities, we’re moving back to benchmark weight after several months of underweighting stocks. TSX earnings are closely tracking our 2004 forecast (for +28% for the year), but we’ve lifted our 2005 projection a point to 10%,” it says.

While economic growth is weakening, CIBC doesn’t see this as purely bad news for stocks. “Had the combination of higher energy prices and US consumer debt fatigue not stepped in as we had expected, the Fed and the Bank of Canada would have been pushing up rates more aggressively,” CIBC notes.

With the world economy slumping, CIBC says that it is favouring a defensive mix of stocks, “being underweight or neutral in the more cyclical, high beta sectors, and overweight telecoms, heath care and staples.” “With oil in what should prove to be a temporary retreat, we’ve cut the extent to which we are overweight the energy sector in half, taking profits out of a position we’ve held through the year, and are bringing our financials holdings up to benchmark in light of generally upside earnings surprises,” it says.

The report says that the banks’ business outlook remains positive. “We expect the Canadian banks to benefit from a gradual recovery in commercial borrowing activity, which has been evidenced in the latest Fed lending survey. Consumer borrowing should remain stable in a benign interest rate and employment environment,” it recommends a Market Weight stance in both banks and insurers.

“Canadian insurers with significant excess reserves for variable annuity and segregated fund guarantee risk should have the capacity to deal with a material deterioration in equity markets,” it notes. “A decline in the value of the Canadian dollar relative to the US dollar and other currencies should have a positive impact on the earnings of the Canadian insurers.”

The firm notes that its equity research analysts share overweight views on energy and health care, but are also upbeat about some of the materials sub-sectors (metals, golds). And, the firm’s quantitative model is more immediately optimistic than the economics and strategy team, calling for an overweight in stocks and underweight in cash.

Technical analyst, Larry Berman, also sees hope for stocks before year-end, but not just yet. “As a result, he’s taking his overweight in equities down to an underweight in favour of building cash, and staying away from the most market-sensitive [sectors].”