Managers favour U.S. equities, oil: survey

A recent Russell Investments Canada poll shows that while a majority of investment managers still like Canadian equities, an increasing number expect U.S. equities to be a source of growth in the second quarter of this year.

Bullish sentiment on Canadian equities, while falling 9% this quarter, still sits at a very strong 68%, the poll shows. Eighty percent of managers see the Canadian market as fairly valued, and 50% say they’re bullish on small caps. Twenty-four percent said they were bearish on small caps.

Looking south of the borderThe report explains that Canada’s resilience through the economic downturn along with impressive market performance make it likely that investors will turn elsewhere for new undervalued opportunities. Bullish sentiment on U.S. equities rose 10% from last quarter to 64% this quarter, with bearish sentiment among only 15% of managers.

“U.S. GDP growth is expected to surpass Canada’s in 2011 and we have recently seen strong US corporate earnings, including in the financial sector. Add to this a relatively cheap stock market and the safety net of November’s quantitative easing program, and the case for U.S. equities has certainly become stronger in recent months,” says Sadiq Adatia, chief investment officer of Russell Investments Canada.

Cash continues to be out of favour, with only 18% reporting bullish sentiment. The poll also shows bullish sentiment to be very low on conventional bonds, at only 12%, while 71% were decidedly bearish. By contrast, 33% of respondents reported bullish sentiment on high yield bonds, up 11% from last quarter.

The global pictureThe picture is not so rosy across the pond, the poll shows. Bullish sentiment on EAFE equities has tanked, falling from 60% to 38%.

“Housing is still weak, international banks have more stress tests on the horizon, and Greece and surrounding nations may not have seen the last of their fiscal challenges,” Adatia notes.

“Emerging markets, which attract a risk premium even during times of peace and stability, have been unsettled by unrest in the Middle East. Although we view the current tension as a short-term issue, bullish sentiment has fallen from 69% to 36%, and bearish sentiment has climbed from just 8% to 21% of managers,” Adatia continues.

Against the background of this tension overseas, nearly 50% of investment managers are bullish on the Canadian dollar. “Whereas geopolitical uncertainty typically leads to a stronger U.S. dollar, fears about a constrained oil supply are simultaneously lending support to our home currency,” Adatia says.

Oil up, gold downA majority of managers polled (52%) chose oil when asked which commodity they expect to perform the strongest in 2011, while 21% said natural gas, and 15% identified copper.

Gold, silver and uranium, all of which have enjoyed strong performance, came in at a range of only 3%-6%.

“After a long period when preserving capital was a top priority, investment managers are once again pursuing growth—whether shifting capital from gold to oil, or from Canada to the U.S. Capital flows will always be dynamic, and we believe the best way to have exposure to the right opportunities is to remain fully invested and intelligently diversified,” says Adatia.

Staff

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