Many Canadian infrastructure equities appear undervalued given current fiscal stimulus plans, notes a new report from CIBC World Markets.

“There may still be time to capitalize on the pending (infrastructure) boom,” says Jeff Rubin, CIBC World Markets chief economist and chief strategist, in his latest Canadian Portfolio Strategy Outlook Report.

“Governments, the world over, are now buying jobs and investing in the future by ramping up infrastructure spending,” he says. But while investors have already priced in the resulting rewards in the U.S., Canadian and global infrastructure stocks “have yet to react significantly to the upcoming boom.”

In Canada, Rubin estimates that 40% of infrastructure spending will be in the power sector, particularly segments that have a very light carbon footprint like hydro and nuclear. He also expects significant inflow of infrastructure money into the transportation sector, followed by health infrastructure. “That raises the prospects, not only of benefits for traditional infrastructure suppliers like transit and transportation equipment manufacturers and engineering firms, but also information systems suppliers,” he says.

Rubin is forecasting that US$650 billion will be spent globally on infrastructure over the next two years.

Despite the stimulus on the way, Rubin is expecting two more quarters of grim economic news. “Beyond the weight of the fiscal artillery being deployed, there’s the all critical issue of how long till relief reaches hiring halls and boardrooms,” notes Rubin. “Even the most ambitious fiscal plans and measures taken by the (U.S. Federal Reserve) and other central banks to date won’t prevent GDP in most of the OECD from printing negative in the next couple of quarters, and intensified weakness elsewhere.”

As a result, Rubin has downgraded his near-term economic outlook for Canada and the U.S., and has trimmed his global GDP forecast to 1%, half of earlier expectations.

However, he continues to see a recovery taking shape in the second half of 2009 and is sticking to his 11,000 year-end target for the TSX.

While massive fiscal stimulus will prove beneficial to the stock market, Rubin notes that exploding budget deficits will not be good for the bond market. “Sovereign bond markets have been one of the few places to find shelter for much of the last year, but that safe harbour is increasingly threatened by the flood of issuance needed to finance already large and growing government deficits,” he says.

History is another source of caution for bond investors, says Rubin, pointing to previous deficits half the current size in relation to the U.S. economy that were ultimately monetized by the Federal Reserve Board. “With as much as 50% of Uncle Sam’s debt owned by foreigners, expect the printing presses to be working overtime at the Federal Reserve Board.”

As a result, Rubin is making a defensive adjustment in his model portfolio by moving a percentage point of weighting from bonds to cash.

He has also added a percentage point to his already “overweight” position in the gold sector. Rubin’s added weight in gold stocks is funded by an equal point cut to his sizeable “overweight” position in the consumer staples group, which has been the TSX’s best performer in the last six months.

Elsewhere in the portfolio, he’s maintaining a four percentage point “overweight” stance in the TSX energy group despite trimming his oil price forecast to an average of US$50 a barrel this year.

IE