CIBC World Markets says its model portfolio has been outperforming itsbenchmark in 2005, largely due to energy stocks. The firm is calling for more of the same from energy stocks, and says that income trusts and long bonds will likely be winners this year, too.

”We have opened up a 52-bps lead over the performance of our institutional benchmark during the first two months of the year, primarily on overweighting the energy index,” CIBC WM says in a new report. “Energy stocks, which have been trading at a sizeable discount to cash flow, are finally getting belated market recognition that high energy prices are here to stay.”

CIBC WM predicts that rising global crude demand and the accelerating depletion of conventional supply, should support an average price of US$55 a barrel next year. As a result, it has raised its target for the TSX energy sector from 2,300 to 2,600 and its holdings in energy stocks to five percentage points above benchmark weighting at 25.9%.

“While the index has risen by about 40% since last May, valuations are only now catching up to cash flow, as the stock market ever so reluctantly begins to acknowledge the permanence of high oil prices,” it says. “The supply outlook for crude over the next 3-4 years points to ever-tighter markets.”

Outside of energy, the performance of the TSX has been far less impressive, CIBC WM says. It reports that, excluding the 17.8% total return from the energy sector since the beginning of the year, the return from the rest of the index was a paltry 1.5%. “That’s not likely to change in the near term with the Fed poised for further interest rate increases, which should restrain investor enthusiasm for the broad equity market,” it says, noting that it has raised its target for the federal funds rate to 3.25%, with the Fed likely to reach that level by June.

“A more benign rate environment should prevail in Canada,” it predicts. “An overvalued Canadian dollar has pre-empted further Bank of Canada rate hikes and will ultimately compel a rate cut down the road.”

CIBC WM says, “The highly levered income trust market, as well as long duration bonds, promise to be the big winners from this rate environment. Dividend-rich stocks featured in the telecom and utility sectors should also benefit.”

As for financial stocks, CIBC WManalysts say, “Canadian banks should benefit from a gradual recovery in commercial and corporate borrowing and stable capital markets. Consumer borrowing should remain stable in a benign interest rate and employment environment. Excess capital will be utilized through dividend increases and share repurchases.” As a result, CIBC WM is maintaining a Market Weight stance, “although we suspect bank earnings growth will remain pressured over the coming quarters”.