CIBC World Markets is nudging its recommended stock allocation higher by one percentage point to 57%, a 7% overweight. The move would drop its bond allocation to 33%, a 5% underweight in that category.

“The prospect of further central bank rate hikes together with a buying opportunity arising from the 257-point correction in the TSX in February have lead us to shift weighting from bonds to stocks,” it says in a report.

The firm says, “Our 13,200 year-end target for the TSX implies another 14% total return from stocks over the balance of the year — over double the return expected from bonds.”

CIBC predicts that the new Fed chairman Ben Bernanke will hike interest rates again at the next Fed meeting. And, it notes that the market is looking for another two hikes from the Bank of Canada down the road. “While BoC rate hikes will adversely impact the front-end of the yield curve, we remain long duration, expecting to see an inversion in the Canadian yield curve,” it says.

The firm remains double-weighted in income trusts (10% versus a 5% market weight) in expectation of another 40-bp decline in long-term interest rates in 2006.

“February’s correction has left good value in two of our key overweight stock sectors: energy and materials,” CIBC adds. “Together the two sectors have four times the weight in the TSX than they have in the S&P 500.”

“Within energy we favour heavy oils, which by virtue of their oil sands reserves, are the biggest beneficiaries of further increases in world crude prices. Gold stocks remain our preferred segment of the materials index. Our forecast of $575-$600 bullion should create a double-digit upside for gold stocks this year,” it says.

The firm is also moving to an overweight position in industrials, after reducing its underweight last month. “While segments of the sector are exposed to a 90¢ Canadian dollar, over 50% are rails that are benefiting from strong commodity markets and better fuel efficiency compared to trucking,” it says. “Another 20% of the materials group is in the aerospace/defense sector that could potentially benefit from ramped-up defense spending from a new Conservative government in Ottawa.”

“To make room, we are moving to an underweight on telecoms. While dividend yields in the sector remain attractive, a systemic lack of pricing power has hurt profit growth,” it says, adding that, “We remain underweight the info-tech and the consumer sectors.”