Report says oil stocks still cheap

Report says oil stocks still cheap

TheStar.com - Business - Report says oil stocks still cheap

Values poised to rise as higher commodity prices are factored in, bank economist says
April 03, 2008 Madhavi Acharya-Tom YewBusiness Reporter

Energy stocks still haven't factored in the value of $100 (U.S.) per barrel for oil, and that may be a hidden opportunity for investors, the chief economist for CIBC World Markets said in his latest research report.

That's among the reasons Canadian investors don't need to run for cover from the U.S. economic slowdown, economist and chief strategist Jeff Rubin wrote.

"Although even a modest U.S. recession would ordinarily be a sign for investors north of the border to hunker down, we do not believe that a shift to a completely defensive posture is as warranted today as it might once have been," according to Rubin's monthly ``Canadian Portfolio Strategy Outlook'' report, released yesterday.

Rubin has a year-end target of 14,500 points for the S&P/TSX composite index and he thinks it will hit 16,200 by the end of 2009.

That means the TSX would continue to beat the U.S. S&P 500 index with a return of 7.7 per cent this year and 14.1 per cent in 2009.

The stock market strength will come from mostly the energy and materials sector, which has been driving most of the gains for the past five or six years, Rubin said.

"I think we're going to see new all-time highs in the energy and materials sector, particularly the energy sector."

That's despite the recession in the United States, Rubin added.
While some economists say the slowdown south of the border will dampen demand for oil and commodities, Rubin pointed out prices are already at record highs, despite the current economic turmoil, largely because of massive demand from Asia.

"The U.S. isn't as decisive to those markets as it once was," Rubin said.
These higher commodity prices aren't being fully reflected in energy stock valuations, he said.

"In oil stocks, for example, they're pretty well pricing in $75 oil and oil is over $100."
Look for stock prices to rise as the remaining increase is factored in, he added.
Rubin's model portfolio is "overweight" in energy and material stocks, he said in his report. He said he expects firm prices for a range of commodities as supplies remain stretched for many minerals and industrial metals.

He said he remains "overweight" in bonds as well, expecting a 1 percentage point cut in interest rates by the U.S. Federal Reserve this year and a reduction of three-quarters of a percentage point by the Bank of Canada.

Rubin is "underweight" in financials, and he is expecting more asset writedowns resulting from the U.S. subprime mortgage market. U.S. commercial banks start to report their earnings in the third week of April, "raising the spectre of a further deluge of writedowns, which could affect valuations on both sides of the border," Rubin stated.

"Some Canadian banks now have significant stakes in U.S. banking."

He said he also believes gold's recent retreat to below $900 an ounce will be temporary, given the weak U.S. dollar, worries about inflation and more interest rate cuts by the U.S. Fed.

"I think gold is going to recover," Rubin said. "I think the Fed still has quite a bit more interest rate cuts to do, and in an environment of rising U.S. inflation, I think that's probably going to see gold top $1,000 an ounce."

Rubin and his team of economists see a "modest" downturn in the U.S. economy, with signs of recovery starting to show in the second half.

Still, Rubin believes Canada will be able to avoid a recession.

"Parts of the Canadian economy, like southern Ontario, are going to be affected, but I don't think the Canadian economy as a whole is going to see a recession," he said.