Sharply rising prices for energy and energy stocks have caused CIBC World Markets Inc. to load up more heavily on energy and pull back on financials.

“Soaring energy prices and energy stock multiples have led us to materially raise our 12-month target for the TSX energy sector from 3,250 to 4,250,” Jeff Rubin, the firm’s chief strategist, said in a new research note.

Rubin said crude and natural gas prices were already well through the firm’s target prices for next year even before Hurricane Katrina hit Gulf Coast wells and refineries. “With roughly 30% of U.S. crude production knocked out of commission, much higher prices are likely to be with us for the rest for the year,” he said.

In view of the 40% upside it sees in the energy sector, the firm is increasing its already substantial overweight in the sector by two percentage points to 34.5%, compared with a benchmark weight of 26.5%. Those two points come out of financials, which it drops to a 28.8% weight, below its 30.8% benchmark allocation.

“Our revised energy targets will also push up our TSX composite target for next year by 800 points from 11,000 to 11,800,” Rubin said. “Since virtually all of the expected gain in the index will come from energy stocks, we remain only index-weight stocks. Aside from energy, we have slight overweights on telecom and utility stocks, owing to their attractive dividend yields. We are underweight most other sectors of the market, this month adding financials to the list, on account of already rich earning multiples for banks and a flattening yield curve.”

“The Bank of Canada and the Federal Reserve Board may still be raising interest rates. But the bond market is already viewing that as a monetary policy error, given the forecast implied by falling long rates. And with oil trading at near US$70 per barrel, who can blame it?,” he said. “Long Canada yields are going to continue to decline to at least 4%, warranting an overweight in fixed income and particularly long duration government bonds.”

“That’s good news for the income trust market, which is well on its way to replicating, if not bettering, last year’s 29% rate of total return,” he said. “Over the first eight months of the year, the CIBC World Markets Income Trust Index is already up 24%, comfortably ensuring the trust market will for the fourth consecutive year lead all asset classes in return.”

It maintains a 39% weight on bonds, two points ahead of market weight; 50% in stocks; 10% in income trusts, which is double their market weight; and just 1% in cash.