CIBC World Markets is standing by its decision to favour financials and energy stocks on the back of continued high oil prices. The firm’s November Portfolio Strategy Report echoes a call made in October.

In the November report by Jeff Rubin, chief strategist at CIBC World Markets, writes, “Our call that crude prices will average at least $50/bbl continues to drive our asset allocation strategy, with portfolio overweights in energy and financial stocks, and in bonds, at the expense of cash.”

The report notes that, despite a 23% gain so far this year, “We believe that energy stocks are still almost 20% undervalued relative to the cash flow that $50 crude and $7.25 natural gas will generate next year.”

Energy is the firm’s biggest overweight at 22.4%, compared with a market weight of 18.3%. “Crude oil’s rise principally reflects constructive fundamentals rather than speculation, suggesting prices will remain high even if weather and other short-term distortions ease,” CIBC said in a separate report on the sector.

“The growing thirst of industrializing economies like China and India, which are two to three times as oil-intense as North America per unit of GDP, is lifting global crude demand at the fastest pace in 24 years. With discoveries replacing less than half of the oil consumed, dependence on non-conventional sources like Deep Sea and Alberta’s tar sands is growing. High prices will be needed to exploit these abundant but costlier sources,” it explains.

“The second prong of our strategy is to leverage our portfolio to falling long-term interest rates,” it notes. “While the North American bond rally is still in open defiance of rate hikes by both the Fed and the Bank of Canada, we expect to see both central banks scurrying to the sidelines next year as energy prices bite into economic growth. The prospect of another 50-bp decline in 30-year Canada yields leads us not only to be overweight bonds (a view shared by our quantitative analyst) but also to overweight financial stocks in our equity portfolio.”

The only notable change in CIBC’s model portfolio from October, is a 0.7% drop in its allocation consumer discretionary stocks and an accompanying 0.7% hike in the materials sector (although it remains markedly underweight at 13%, compared with a market weight of 16.5%). The firm is making this move, “in view of rapidly improving prospects for both gold and uranium, which together account for almost 40% of the sector’s market cap. High energy prices are rekindling interest in nuclear power and hence uranium, while gold continues to be a beneficiary of a weakening greenback.”