Managers turning optimistic on equities

Institutional money managers have taken a more positive outlook on the overall Canadian equity market, with bulls outnumbering bears for the first time since December 2005, according to the latest Russell Investment Manager Outlook survey.

That is not to say they are throwing caution to the wind, however, as the greatest portion of respondents fall into the “neutral” category. Only 36% said they were actually bullish on the broad Canadian market, up from 28% in the previous quarter, but enough to edge past the 34% who were bearish. Still, only 2% of managers would go so far as to call the Canadian market undervalued.

“This is a notable improvement from last quarter, when only 28% of investment managers were bullish,” says Tim Hicks, chief investment officer, Russell Investments. “The reason for increased optimism is likely similar to what we’ve seen in the U.S. — a cooling of commodity prices and inflation fears, and a protracted pause in central bank hikes.”

Respondents were particularly bullish in the financial services, telecoms and information technology sectors, with at least 50% expressing confidence in these areas. Last year saw a shift to defensive sectors, resulting in a run-up in consumer staples, which are now largely seen as overvalued, with 34% of managers expressing bearishness.

“Manager bullishness for the financial services is consistent with the more general optimism around large cap growth stocks and a sense that rates may have peaked,” says Hicks. “It may also be a reflection of the desire for yield alternatives following the decline of income trusts.”

The flipside of the improved equity sentiment is seen in the bond market, with bearish sentiment climbing from 23% to 35%.

Improved sentiment is not restricted to Canada alone, as 62% of managers expressed bullishness toward the EAFE markets, compared to just 36% in the prior quarter.

“Heightened manager enthusiasm for EAFE markets reflects the slumping manufacturing and housing sectors in the U.S., the growing strength of EAFE currencies and the relatively low valuations of regional equities,” says Hicks. “After the fear and tension that pervaded the earlier quarters in 2006, investment managers may now be transitioning to cautious optimism.”

The view on the American market has also recovered significantly among Canadian money managers, perhaps reflecting negative sentiment toward the loonie. Fifty-one per cent of managers said they were now bullish on U.S. equities, placing the American market second only to EAFE countries.

Sentiment toward emerging markets improved but is still evenly split between bulls and bears, at 35% each.

The strongest bearish sentiment is directed at high yield Canadian debt and real estate, with 57% calling for declines in each of these assets. There were fewer managers sitting on the fence regarding high yield debt, however, as bullish sentiment rose to 26% from 10% last quarter.

There was also an overall bearish sentiment toward the price of oil, with 47% expecting it to fall over the next 12 months, compared to 23% expecting it to rise.

“Perhaps the most significant change in mood is a general reduction in pessimism,” says Hicks. “As more of the bears move into neutral territory, one can infer that the fear and tension that pervaded earlier quarters of 2006 may be transitioning into cautious optimism. Whether this optimism develops into widespread bullishness in 2007 remains to be seen.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com