Managers look to global investing in 2006

Even though North American markets are expected to outperform Japan and Europe next year, investment managers say the time is right to revisit portfolio holdings and consider investments outside of Canada.

According to the Canadian Investment Manager Outlook, a survey of 30 senior level investment managers at Canadian firms conducted by Russell Investment Group, managers see more prospects for advances in international equities than any other asset class in the coming months.

Although the managers surveyed favour international markets, they remain positive on the broad Canadian equity market. Two-thirds say Canadian stocks are either fairly valued or undervalued.

National Bank Financial chief economist and strategist Clément Gignac is not so bullish on Canada. At a recent Toronto Association for Business and Economics meeting in Toronto, he told his audience to take their profits now. He says the United States is headed to a consumer slump, and there is some concern about performance on the TSX in the coming year. “Take it with a grain of salt, I’ve been in left field and wrong before, but we’re trading at peak earnings in Canada big time,” he says.

In his detailed semi-annual publication, Economic and Financial Outlook, Gignac says the Canadian stock market is very likely to disappoint investors. “The prospect for the coming year is an end to the party and a return to greater realism,” he writes. “Business profits in Canada now exceed 14% of GDP, a record level that surpasses those reached in the 1974 and 1979 oil shocks. The markets rarely reward investment in the equity of companies whose profits are at a peak.”

On the investments side, Tim Hicks, chief investment officer at Russell Canada, says money managers believe leadership in financials and materials should be enough to keep the Canadian market moving forward, even if valuations soften in energy and utilities. “Managers are bearish on prospects for energy, utilities and industrials, but sentiment is positive or, at worst, neutral for the other seven sectors.”

Financials registered the highest number of positive votes with 74% of managers saying banks and insurance companies show good growth potential as a result of fee-based and capital markets activities. Economists, on the other hand, say bank earnings are being driven by brokers and markets, and question the sustainability of double-digit growth that has been fuelled by mortgages and credit.

The clearest survey result however, is the bullish outlook for the Canadian dollar. Hicks says this is consistent with the positive view of the materials sector and indicates an expectation of continued cyclical demand for Canada’s resources.

Managers overall are bearish on small cap stocks, which typically struggle in periods of rising interest rates, and downright negative on the prospects for fixed income. In particular, 86% of managers surveyed were bearish on the outlook for high yield bonds.

Gignac agrees, saying it is best to avoid corporate bonds, especially those tied to the U.S. consumer sector.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com