CIBC World Markets has raised its target for the S&P/TSX index to 12,000.

In a new report, Jeff Rubin, the firm’s chief strategist writes “We have raised our target for the world’s most energy intensive stock market — the TSX — to 12,000 next year, in line with expectations for another 30% gain in energy sector valuations.”

“Our eight-point overweight in the sector enabled our equity portfolio to once again beat the TSX index last month, raising our cumulative lead over the index return to 303 basis points during the first nine months of the year,” he adds.

The report suggests that CIBC, “continues to see energy stocks significantly undervalued, relative to not only our own 2006 forecast of $84/bbl crude but even to today’s spot price. As was the case last year, valuations should continue to trail exploding cash flows while cash flow multiples in the energy sector will continue to rise on the back of strengthening long-term expectations for energy prices.”

Despite its heavy tilt to energy, CIBC remains with just a market weight in stocks overall, “given a lacklustre outlook the rest of the index. Rising energy prices and a flattening yield curve spell negative news for financials, industrials, materials, info tech and consumer discretionaries which are all underweighted in our equity portfolio.”

“In addition, investors should become increasingly aware of the impact of a soaring Canadian dollar on both cost competitiveness as well as on the currency translation of foreign earnings,” Rubin writes. “The dividend-rich utility and telecom sectors aside, it is unlikely that the non-energy part of the TSX will be materially higher 12 months from now than it is today.”

The firm recommends that long duration bonds should continue to be overweighted despite the prospect of further rate hikes from both the Federal Reserve Board and the Bank of Canada. “Neither central bank seems as yet, particularly concerned about the economic fallout of soaring oil prices,” Rubin adds. “But global economic growth has already slowed materially in the face of rising energy prices and it will continue to decelerate over the next year.”

“The prospect of further declines in long-term interest rates should continue to bolster returns from income trusts, which remain double-weighted in our asset mix,” Rubin concludes. “As in the case of stocks, the energy sector should be overweighted, with returns from oil and gas royalty trusts roughly three times those of the rest of the trust market.”