“Reduce Overweight In Energy Stocks”, Warns CIBC World Markets

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Many of our Canadian readers will have heard about this already, but better later than never. CIBC World Markets, the corporate banking arm of Canadian bank CIBC, made “a significant realignment in [its] equity portfolio this month by reducing [its] position in energy stocks from a 4.5-percentage-point overweight to a 3-percentage-point overweight“, citing increasing risks linked to efforts by North American governments to reduce energy consumption and limit greenhouse gas emissions. CIBC WM made the announcement in its latest Canadian Portfolio Strategy Outlook report (PDF document), released on Monday Feb. 5. I decided to discuss this research note here for 2 reasons: (a) even though the report is called “Canadian Portfolio Strategy Outlook”, the discussion on the short-term investment risks and opportunities linked to current efforts to combat climate change applies as much to the Canadian context as it does the US context; and (b) this is the 1st time, as far as I can tell, that a major North American financial institution not only acknowledges the investment risks associated with climate change, but also translates that acknowledgment into a realignment of its portfolio. Here are a few more interesting excerpts from the report: “As with so much of North American environmental legislation, the state of California, representing the world’s 12th largest energy market, is once again taking the lead. The state’s tough new legislation is targeting a reduction to 2000 emission levels by decade-end and an eventual 25% reduction to the Kyoto-benchmark 1990 level by 2020. At the federal level, a bipartisan bill sponsored by Senators McCain, Lieberman and Obama seeks to establish a national cap and trade system for regulating greenhouse gas emission in the US economy, another sign that the issue has now crossed party lines” “From mandating greater ethanol content in gasoline to raising minimum fuel mileage standards, governments are waging a war on carbon. We expect the rest of North America will likely adopt cap and trade systems for GHG emissions along the lines recently introduced in California. Utilities and oil sand producers would be adversely affected. We have dropped our overweight in utilities and reduced our overweight in oil sands although the latter are still likely to be aggressively pursued by global energy giants.” “The 1.5-percentagepoint (see quote above) weighting cut is in view of both lower-than-expected crude demand growth in OECD countries and the increasing likelihood of some form of cap and trade system in North America regulating greenhouse gas emissions.” “Within […] the materials group, we favor the agricultural fertilizer group, where valuations have soared as increased government support for ethanol production bolsters corn acreage and forecasts of future fertilizer demand.”


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