The big blackout of 2003 has sparked changes to CIBC World Markets’ U.S. portfolio strategy.

A research report released Monday suggests that the increased investment in the power grid that will be necessary in the wake of the blackout is going to increase the upward slope of yield curves.

This adds to an already-evident trend toward higher yields and narrower corporate spreads as the fixed income markets price in recovery.

CIBC sees rates heading higher over the next 12-18 months. “In our view, rising long rates appear likely with potential stability around 5-6% for 10 year and 30 year rates, and limited risk of 6-7% respective yields,” says report author Subodh Kumar.

“We expect earnings gains to support markets and equity valuation risk is likely secondary in post 2003 blackout markets,” Kumar says. “For less defensive markets, we have overweight small/mid cap. Earnings momentum and less pent up consumer demand potential has us reducing consumer discretionary in favor of materials and industrials.”

Following the blackout, Kumar says that corporate reinvestment for efficiency and increased infrastructure spending favors industrials even more. “We have an industrial over weight (now 14.5% versus 10.5% on S&P 500). The post blackout requirements of increased power grid refurbishment should be positive for industrials from generation capacity to capital goods to develop and install it such as earthmoving, and even freight.”

“Pre blackout, energy was under-appreciated compared to utilities. It is even more so now as utilities likely face not only prior refinancing needs but also reinvestment requirements that may detract from dividend potential,” Kumar argues. “On top of post deregulation driven restructuring that has been underway for several quarters and weak earnings momentum, utilities , especially electric, now have even greater and urgent infrastructure investment requirements that may supersede dividend increases that initially in 2003 drove utilities to out performance.”

“Our favored alternate investments holdings now include commodities and precious metals in a diversification from our prior real estate focus, now reduced,” Kumar says. “We incorporate improved probabilities that global growth is likely to expand thus expanding demand in these areas. Higher deficits could also increase interest in such segments as diversification from currencies.”