The world economy may be slowing but should perform above levels that sparked earlier commodity recessions, according to a new CIBC World Markets report.

“With Europe in recession and Japan and the U.S. economy in borderline status, world growth outlook is the weakest in years. But it is still nowhere near as weak as plunging resource stocks would suggest,” notes Jeff Rubin, CIBC World Markets chief economist and chief strategist, in the report.

“Our own forecast for 3.7% global GDP growth this year and 3.9% next still implies a stronger performance than the 2-2.5% increases that sparked the last two protracted commodity recessions in 1998 and 2001,” says Rubin. “As was the case in the 2001 recession, China has hardly noticed the U.S. downturn, and we shouldn’t expect other emerging giants like Russia, India and Brazil to notice that much either.”

But dimming global growth prospects and selling pressure on the markets are significant enough that Rubin is taking a more cautious stance with his model investment portfolio. He has lowered his year-end target for the TSX composite index to 13,000 from 14,300, and is cutting his 2009 target to 14,000 from 15,250. “Our targets imply a slightly negative annual total return from the TSX this year but a more typical return next year.”

Rubin remains “index-weight” on overall equity market exposure, but is trimming his “overweight” position in energy stocks by 2.5 percentage points. That move “acknowledges that oil prices are likely to lag our earlier targets in the next year or two” in light of weaker global growth. This year’s oil target has also been lowered to an average US$115 per barrel this year from US$125.

The weighting cut in energy is being moved to financials, which brings Rubin’s portfolio to full market weight in that sector. “The global financial system still faces considerable headwinds, but gradually some of the worst fears are being overcome. The (U.S.) Treasury’s confidence-boosting steps to shore up Freddie and Fannie sooner rather than later will help Canadian players with U.S. mortgage assets. Third-quarter results from Canadian banks were also generally encouraging enough to allow them to make subsequent headway in raising much needed long-term debt and preferred share capital,” says Rubin.

The likelihood that inflation in the U.S. will be a greater problem than generally believed will likely force the U.S. Federal Reserve to be more hawkish than other central banks in the coming months, says Rubin. “That creates appreciable risks for fixed income markets.” As a result, the model portfolio maintains two points “underweight” in bonds with an offsetting cash “overweight” stance.

Rubin remains “overweight” potash and fertilizer products, and he adds that gold producers, along with bullion, should also benefit from a partial unwinding of the greenback’s recent overdone strength. Consequently, he remains “overweight” in that sector as well.