CIBC World Markets Inc. remains bullish on income trusts, boosting its recommended exposure to that asset class.

“With the long Canada bond yields heading to 4% next year, the income trust market should continue to outperform all other asset classes,” it predicts in a new report this week. “Already up almost 4% this year, we expect the CIBC World Markets Income Trust Index to yield a 15% total return in 2005.”

“As long as the economy does not fall into recession, and hence put distributions at risk, the trust market will remain the most attractive play on falling bond yields. Moreover, as was the case in 2002, trusts provide a good measure of downside protection against bear equity markets. The typical trust has little more than half the beta of the typical stock to broad movements in the TSX,” CIBC says in a new report.

As a result, it’s slashing its recommended cash allocation from 4% to 2%, well below the benchmark weighting of 9%. It’s also diverting the cash to income trusts and bonds, pushing the bond weighting to 41%, and the income trust allocation to 8% (double the benchmark’s 4% share). Stocks continue to get a market weight, 49%.

“We’ve raised our weighting in income trusts to 8%, as part of a portfolio realignment to leverage off another 60-basis-point decline in long Canada bond yields over the next 12-15 months,” it suggests in a separate report. “In addition to another 5%-pts of distribution income, we expect to see trust valuations rise by a further 6% between now and year-end.” It adds that the trust sector is increasingly migrating from a retail to an institutional phenomenon de to the removal of legal obstacles and Standard and Poor’s decision to soon include trusts in its TSX benchmark.

“It’s time to put the defense on the field. A 30% rise in crude prices over the last twelve months is taking its inevitable toll on economic growth, cutting the legs out from under non-energy cyclical stocks and challenging market optimism on earnings next year,” it adds. “Unlike the 1973 and 1979 oil shocks, this one is going to be disinflationary in nature. So much so that long duration bonds, high dividend-paying stocks, and highly yield-sensitive income trusts are the places investors will likely be heading.”

“Within equities we are overweight energy, as well as the dividend-rich telecommunications and utility sectors while underweight tech, materials, industrials and consumer discretionaries. The huge build-up in first-quarter inventories in the US economy suggests the economic slowdown may come sooner rather than later,” it says. “We have cut our second quarter US growth estimate and we may soon have to scale back our expectations for Fed tightenings. A 3.50% federal funds rate may well turn out to be a cyclical peak in interest rates. The recent decline in crude prices is unlikely to hold, unless the expected slowdown in global growth proves to be a lot more severe than we have forecast.”