The S&P/TSX composite index could generate total returns above 20% in 2009, but investors should think twice before bulking up on stocks just yet, according to a CIBC World Markets report released Wednesday.

“The near-term risks to the market from a contracting North American economy stand in the way of overweighting stocks at this point,” said Jeff Rubin, CIBC World Markets chief economist and chief strategist, in his latest Canadian Portfolio Strategy Outlook Report.

“We continue to expect the North American economy to contract over the first half of the year, with near-term punitive consequences for earnings,” said Rubin.

Citing an “increasingly challenging economic environment,” Rubin has lowered his 2009 year-end TSX target by 1,000 points to 11,000. However, that still leaves room for an upswing from this year’s expected close of 9,000.

Meanwhile, Rubin said that whatever steps Washington takes to stem the economic crisis will have “huge ramifications on both sides of the border” and resuscitate growth by the second half of 2009. That spells a recovery in both earnings and commodity prices, particularly energy.

“Supply destruction, including cancellations in the Canadian oil sands and offshore projects around the world, will see crude soar back to triple-digit territory toward the end of next year and into 2010.”

Weightings in Rubin’s model investment portfolio have remained unchanged except for a one-point shift of weighting from gold stocks to telecoms. “With M&A deal risks effectively eliminated by recent developments, (the telecom) segment looks appealing as a defensive play.”

Rubin holds a modest “overweight” in bullion and energy stocks, and an above-benchmark exposure to staples and utilities stocks. The latter two sectors have “typically helped to provide portfolio stability in tough times,” he said.

By asset mix, Rubin remains “market weight” in equities, and “overweight” in cash as a defense against “near-certain” market volatility. He remains “underweight” in bonds given that the U.S. deficit is heading for 11% of GDP. The danger, he says, is that “Washington’s already massive and growing fiscal deficit poses huge monetization and inflation risks down the road” if large fiscal imbalances are financed by “cranking up the printing press” rather than issuing debt.

IE