The strong Canadian dollar has led to a few adjustments in the June 2 CIBC World Markets’ most recent Canadian Portfolio Strategy Outlook.

CIBC remains underweight in stocks at 43%, and cash (just 2%, and heavily overweight in bonds (55%). It notes that foreign exchange markets are repricing U.S. assets to reflect the falling U.S. dollar. “The depreciation of the U.S. dollar will boost S&P 500 earnings this year, while a similarly sized appreciation for the Canadian dollar will dampen earnings in the TSX, particularly in the manufacturing and resource sectors.”

“Both the threat of a weaker Canadian economy and a stronger Canadian dollar have led us to overweight fixed income (55%) with a heavy emphasis on long-term bonds. We have retained a 43% weighting in equities, with underweights in materials and industrials and overweights in telecommunications and utilities, both of which should benefit from a falling interest rate environment.”

Due to the currency moves, the firm is lowering its TSX earnings estimates. “A surging exchange rate exacerbates an earnings outlook already weakened by slumping industrial and commodity prices, particularly in forest products and steel, where producers have little choice but to absorb a high currency in their margins.”

Compared with the previous month, CIBC has cut back its allocation to financial stocks to a market weight (32.8%). It has also cut its allocations in materials, industrials and consumer discretionary stocks. It has increased its exposure to techs and telecoms, pushing techs back to a market weight, and overweight in telecoms.

“We have underweighted materials and industrials this month, underscoring their exchange rate vulnerability. Forest products, machinery and furniture exports face the greatest exposure from a rising exchange rate. In wood products and paper manufacturing, exports account for most of industry shipments. At the other end of the vulnerability spectrum, food, textiles, beverages and tobacco have very little net export exposure to a rising currency, as export impacts are nearly offset by currency-induced savings on imported inputs,” it says.

“Earnings are also vulnerable in the domestic market through increased import competition. Both the growing risk of an overvalued exchange rate and of a significant slowdown in the Canadian economy continue to favour a defensive position within stocks, with overweights in both utilities and telecommunication services. Both sectors are likely to continue to benefit from falling bond yields, while telecommunication service providers actually benefit from a rising loonie given their heavy use of imported inputs and the lack of import competition in the domestic market,” it says.

http://research.cibcwm.com/economic_public/download/psjun03.pdf