Recent weakness in the S&P/TSX composite index, and the energy group in particular, should provide a buying opportunity for investors betting on continued economic growth and tighter energy markets next year, says CIBC World Markets in a new report.

“On the heels of a sharp 6% monthly decline in the TSX composite in October, we are raising our equity weighting by 2 percentage points and reducing our bond weighting by a comparable amount,” CIBC reports.

“While the severity of the October correction forced us to scale back our yearend TSX target to 10,750, we are maintaining our 2006 year-end target of 12,000 on expectations of continued healthy growth in energy sector earnings and valuations next year,” it notes.

It remains heavily overweight in energy stocks, noting that even with lower oil prices, the TSX energy sector is a good 10-15% undervalued relative to fair cash flow value.

“Margin pressures have led us to drop our overweight on telecom stocks, while still robust global economic growth has prompted a smaller underweight in materials stocks,” it adds.

Heightened political uncertainty over Ottawa’s tax treatment of income trusts has, at least temporarily, cast a pall over the trust market. “Longer term, we are looking for a 20% total return from the trust market next year,” it says. “Nevertheless we are scaling back our overweight in trusts from 10% to 8% in view of the lingering uncertainty over Ottawa’s legislative plans for the sector.”

It is also raising its cash weighting by 2 percentage points, and lowering the weighting on bonds back to market weight. Both the Bank of Canada and the Federal Reserve Board are likely to continue to tighten until at least year-end, it suggests, “However, rising energy prices are likely to deter Fed tightenings next year, while a rising Canadian dollar should sideline the Bank of Canada in 2006 as well.”