Money managers looking offshore

The Canadian equity rally may be losing steam, if sentiment among investment managers is any indication. In its quarterly poll of managers, Russell Investment Group found only 28% remained bullish on Canadian equities, down from 48% in the previous quarter.

“The reason for this increasingly negative view is clear — they have a decidedly bearish sentiment for both the Energy and Materials sectors,” says Tim Hicks, chief investment officer, Russell Canada. “The overall deterioration in sentiment for Canadian equities is understandable — Energy and Materials constitute over 40% of the Canadian market and have been responsible for much of the strong run in the market over the past two years.”

Over two-thirds of managers surveyed had a bearish view on the energy sector, compared to just 44% who expressed pessimism in the previous survey. Bearish sentiment extends beyond energy to materials, with 43% of investment managers expressing pessimism.

Respondents expressed their greatest optimism toward the financial sector, with 65% saying they were bullish. They also seem to be ready to return to the downtrodden sectors hit the hardest in the bear market — technology, telecommunications, health care and industrials.

But while respondents may be taking a cautious stance toward Canada, they express optimism toward investment opportunities in foreign markets. With the historically high dollar and the strong domestic equity rally, the time seems right for investing overseas.

“Well over half of the managers are bullish on U.S. and non-North American equities,” said Hicks. “Over 50% of managers gave both categories bullish ratings, with EAFE — or the European, African and Far East equities — favoured over the U.S. by 65% to 57%.”

That is not to say they are jumping into foreign markets with both feet. Despite the removal of the Foreign Property Rule (FPR) for registered accounts, 42% of managers recommended a 30%-40% exposure to Canadian markets for the equity portion of a balanced portfolio

Considering Canada makes up only about 3% of the global equity markets, this is significant over-weighting, and not far off the average weighting before the FPR was lifted. Another 42% felt 20%-30% exposure was better, while only 10% would dip as low as 10%-20% exposure to Canada.

“Although there may be legitimate concerns over foreign currency exposure or an anticipation of increased correlations between equity markets, but the Canadian managers don’t seem eager to take full advantage of the diversification possibilities afforded by the removal of FPR,” said Hicks

In the fixed income market, however, there was little room for doubt. A whopping 72% of respondents were bearish toward the Canadian bond market in general, with 83% pessimistic about high-yield debt. Only 6% bucked the trend on the overall market, and just 3% were bullish on high-yield.

“There is clearly an expectation of higher bond yields going forward as well as a widening of corporate bond spreads, both implicitly a concern over higher inflation and the potential impact on the level and quality of corporate earnings,” said Hicks. “Negative sentiment towards Canadian fixed income did not shift significantly since the last survey, but, then again, it would have been difficult to be more negative.”

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