Stock markets are showing signs that the worst of the recent credit troubles have passed and a late rally should push the S&P/TSX composite index to 15,000 by year-end, finds CIBC World Markets in its latest Canadian Portfolio Strategy Outlook report.

“While some problems remain in the asset-backed commercial paper market, we are becoming more confident that the worst in credit markets may now be in the rearview mirror,” says Jeff Rubin, chief strategist and chief economist at CIBC World Markets.

He notes that with liquidity improving, oil hitting record highs, a base metals rally and good prospects for further rate cuts south of the border, the TSX should not only hit 15,000 by year-end but close 2008 at the 16,200 level. The TSX has already recouped nearly three quarters of the summer’s slide, with the previously hard-hit materials group up 20% from a low in August.

Given this, CIBC WM remains 12 percentage points overweight in equities and has also shifted two percentage points of weighting from cash back into the bank’s still-underweight bond position.

“Despite an initial reluctance, the U.S. Federal Reserve Board signalled clearly with September’s aggressive 50 basis point cut that it now takes the threat of housing contagion seriously, and is ready to adjust policy accordingly,” Rubin adds. He does not think a full-blown U.S. recession is in the cards – in part because he expects the Fed will make further rate cuts.

Rubin also states that with its almost 50% resource capitalization, the fortunes of the TSX are more intertwined with those of the global rather than the North American economy. Resource hungry emerging markets in Asia will keep positive pressure on resource demand and prices.

Rubin argues that while the strong likelihood of royalty hikes in Alberta led to an almost immediate discount of Canadian oil stocks by domestic investors, it does not alter the fact that the Canadian oil sands represents over 50% of the world’s oil reserves open to private investment. As a result, he does not expect the royalty increases to deter large scale foreign acquisition of Canadian oil sands properties over the next 12-24 months.

CIBC World Markets has also added a half point of weighting to the gold component of the materials sector – moving it a full percentage point overweight.

“We are raising our target for bullion to US$800 per ounce by the end of 2008,” Rubin says.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/psoct07.pdf.