CIBC World Markets Inc. is cutting its equity exposure generally, but plowing heavily into income trusts.

In its latest monthly Canadian portfolio strategy outlook, the firm says it is reducing its equity holdings to benchmark weighting and shifting funds to income trusts, which are now double-weighted at 8% of its portfolio. It’s also raising its overweight in bonds, and retaining its very underweight position in cash.

“Even if our now seemingly optimistic outlook on TSX performance this year pans out, the 10%-11% expected total return should be easily beaten by the trust market,” CIBC says, noting that its technical analyst, Larry Berman, suggests there seems little upside for the TSX beyond 9300.

“At the same time, the trust market is poised to see a significant inflow of new institutional funds following on the heels of legislative changes on unlimited liability in Ontario and Alberta, and Standard and Poor’s recent announcement that it will include trusts in the TSX composite,” it notes. “Our quantitative analyst, Yin Luo, estimates that nearly $3 billion of index fund money will subsequently flow into the trust market. There could easily be as much flowing from actively managed equity funds that are benchmarked to a TSX that will likely include as many as 63 income trusts.”

As for bonds, it says, “an eventual flip-flop by the Bank of Canada, punctuated by a rate cut in the next 3-6 months, opens up more rally room throughout the curve. So does negative Canada-U.S. interest rate differentials, which are soon coming with more Fed rate hikes. Spreads are likely to invert by 75 basis points in the overnight market and 30-40 basis points at the long end of the yield curve.”

“Our new target for the long Canada bond yield is 4%, implying double-digit gains for holders of long-duration bonds,” it adds. “As is always the case with negative spreads, the loonie will be the victim, falling to the 75¢-77¢ range by yearend.”

Within equities, CIBC is concentrating its overweights in a narrow range of defensive areas. “We have raised our overweight in energy stocks, which has consistently outperformed the rest of the TSX over the last year. Any price north of $40 per barrel is bullish for the sector while our target of $50 crude leaves valuations still a good 15% undervalued,” it explains. “Our other overweights, the dividend-rich telecommunications services and utilities sectors, will likely withstand any near-term weakness in equity markets given where bond yields are heading.”