CIBC World Markets says that it has returned to strategy of double overweight in income trusts, following the government’s decision to deal with the trust issue by simply cutting dividend tax rates.

“We have gone back to a double (10%) weighting in income trusts in response to Ottawa’s recent announcement that it will not levy any additional taxes on trusts,” says chief economist Jeff Rubin in a new report. “Having already recovered the losses of the last month, we see the trust market making new highs in the next couple of months on renewed buying of income funds. On the heels of what promises to be close to a 30% return this year, we anticipate another year of 20%-plus total returns in this sector in 2006.”

“We have also raised our weighting in the dividend-rich financial institutions and utilities sectors in response to Ottawa’s decision to raise the dividend tax credit, effectively lowering the dividend tax rate,” he adds.

Also, with gold prices passing the $500/ounce mark, and “a still healthy global base metal market”, the firm has been driven from an underweight to a neutral position on the materials sector. “Over the last two months we have added two percentage points to our holdings of these stocks. In contrast we are moving to an underweight in consumer staples in response to deteriorating consumer fundamentals from rising energy prices.”

It remains eight percentage points overweight energy stocks, but only modestly overweight the TSX as a whole. “As we noted last month, overblown fears of energy demand destruction provided investors with a buying opportunity for both the broad equity market and energy stocks in particular. Buoyed by a firming in crude prices and near-record natural gas prices, the TSX energy sector has regained half of October’s losses and is poised to regain the other half this month,” Rubin says.

Bonds continue to outperform cash despite the negative impact of Bank of Canada rate hikes on the short end of the yield curve, Rubin adds. “While we are only market weight bonds, we are overweight long duration bonds, expecting to see a further flattening of the yield curve in response to pending Bank of Canada rate hikes. We see long bond yields heading below 4% next year once a soaring Canadian dollar brings the Bank of Canada tightening campaign to an early conclusion.”