Managers turn bullish on stocks, corporate debt

The stock market rally that started in March has seen the S&P/TSX Composite Index gain more than 3,000 points, leading some to comment that it is an unsustainable bounce off the bottom. But this theory is held by a minority of investment managers, with most seeing more growth ahead, according to the latest survey by Russell Investments.

Only 21% of respondents in the Russell Investment Manager Outlook poll said the S&P/TSX index was overvalued. Nearly two-thirds (63%) said they remained bullish on Canadian equities, even though only 45% said the index was undervalued.

This 18-percentage point gap suggests that while nearly one-fifth of respondents do not see stocks as a bargain, they see the alternatives as less desirable. The survey found that 61% of managers were bearish on cash, compared with 8% who said they thought it remained desirable.

“An increased appetite for risk is a common theme this quarter. The most notable evidence is the outlook for cash,” says Sadiq S. Adatia, chief investment officer of Russell Investments Canada Ltd. As returns on cash and cash equivalents have crumbled so, too, has their status as a safe haven investment.

“At Russell, we believe investors should remain fully invested at all times, because markets are always more positive than negative over time,” says Adatia. “Those who choose to hold cash are, more often than not, leaving money on the table.”

Investment managers were most bullish on energy stocks, with 74% saying the sector remained promising with the price of oil still less than half of its cyclical high. Managers were also bullish on financial services stocks (70%), which have proven resilient in the face of pressures on the global financial sector. The broad materials sector was also promising in the eyes of 64% of managers.

“Excluding gold, this sector was deeply depressed in recent quarters and appears to be staging a comeback on the widely anticipated resumption of global growth within the next few quarters,” says Adatia.

With the outlook for Canadian stocks being so positive, the heavy weighting in the export-driven commodity sectors should support a rising Canadian dollar, he says.

In terms of consumer spending, managers are shifting their focus from staples to discretionary — a sign, perhaps, that they believe the worst of the recession is over. Bullishness on staples declined to 28% in the latest survey, from 46% in the previous quarter, while interest in discretionary stocks increased to 47% from 39%.

“Given the more optimistic economic climate, this could be an indication that investment managers expect pleasure, rather than simple necessity, to again become a driver of consumer behaviour,” says Adatia.

Managers are expressing more confidence on the fixed income side of the market as well, with 54% now favouring high-yield debt, up from 31% in the previous quarter, while 55% are now bearish on government bonds.

Canadian markets are not alone in seeing an uptick in bullishness, as 67% of managers took a favourable view of emerging markets, up from 43% in the previous survey.

“It is likely that many now believe the hard-hit markets of the developing world have become oversold,” Adatia says. “In contrast, the outlook actually dimmed slightly for U.S. and EAFE stocks this quarter, possibly because other regions — such as Canada and emerging markets — are seen as offering more attractive prospects.”

The outlook for U.S. markets has 45% of managers feeling bullish, while 29% are bearish.

(06/29/09)