CIBC World Markets remains underweight in stocks and cash, and overweight in bonds in its model portfolio.

In its Canadian Portfolio Strategy Outlook for October, the firm is calling for a 45% equity allocation, against a market weight of 51%, with 5% in cash and 50% in bonds, versus market weights of 10% and 39%, respectively.

“Disappointment over only 3% U.S. fourth quarter growth and less than 1% first quarter inflation should trigger a retreat in the TSX back to the 7,200 level over the next two quarters with the high-flying tech and cyclical stocks leading the way downward,” it says. “Energy, financials and consumer staples remain a safe sanctuary.” Within the TSX, CIBC is overweighting those three sectors, and underweighting industrials, techs and materials.

“A return to near-June level bond yields should ultimately set the stage for a second half 2004 rally that should push the TSX to 8300 by the end of next year,” it predicts. “Bond yields are already creeping down and will continue to do so, on the same growth and inflation numbers that should prove challenging to the equity market.”

CIBC also predicts that rising exchange rates should compel the Bank of Canada into another 75 basis points of rate cuts over the next six to nine months, “adding further impetus to a building rally in the Canadian bond market.”

From a technical standpoint, CIBC says the equity markets have entered a clear consolidation phase. “We are reluctant to get too bearish on the overall equity markets, but do recognize the risk the TSX and S&P 500 have a modest (3-5%) consolidation to come. The risks in technology and cyclicals is probably in the 5-10% range over the next month or so. We will use this potential weakness to increase equity exposure in the next few months.”