It appears the running of the bulls is expected to continue into the new year. According to the latest Russell Investment Manager Outlook, optimism abounds as 83% of investment managers believe the S&P/TSX Composite Index will experience gains in 2010.

“This confidence is built on a foundation of strong bank earnings, improving economic statistics, rising commodity prices, and a rebounding residential real estate market. Indeed, despite continuing high unemployment numbers, Canada’s relative prosperity remains the envy of the world,” says Sadiq S. Adatia, chief investment officer of Russell Investments Canada Ltd.

As a result of Canada’s stable economy, money continues to flow into the Canadian dollar, helping to keep it aloft versus the U.S. dollar. Sixty per cent of investment managers surveyed remain bullish towards the loonie, while only 17% expect it to soften in the coming months.

Energy continues to be the darling of the Canadian market, with 71% of managers bullish and only 14% bearish. Financial stocks also remain in favour, with 61% of managers bullish and 21% bearish.

“With the shares of Canadian oil producers priced for roughly $65/barrel, the recent trading range in the area of $75-plus implies continued upside potential for the Energy sector,” explains Adatia.

“Sentiment deteriorated slightly since last quarter in the financials sector, perhaps in reaction to Manulife Financial’s dividend cut and equity financing, but bank earnings remain strong and dividends have continued to flow uninterrupted.”

Sentiment towards the information technology sector – often considered a proxy for Research in Motion (RIM) – slipped from 63% bullish to 57% bullish. “This may reflect concerns that competition for RIM’s Blackberry product is heating up,” says Adatia.

Record-high gold prices continue to prop up sentiment towards the materials sector, which is currently at 54% bullish and 32% bearish. “We suspect that the materials sector ex-gold would not garner as strong an endorsement from investment managers,” says Adatia.

The telecom sector continues to hold appeal, with bulls up from 48% to 52%, and bears holding steady at 32%. “The sector offers solid yields, healthy earnings, and modest valuations — attractive traits for investors seeking a relatively conservative equity play,” says Adatia.

“In contrast, utilities, industrials, consumers discretionary, and consumer staples are traditionally considered defensive sectors with solid if unspectacular growth potential. This may explain why bullishness towards all four declined this quarter. In the current rising market environment, investment managers are likely finding more compelling growth opportunities elsewhere.”

Adatia also noted that recent disappointing earnings from consumer discretionary stocks (such as Shoppers Drug Mart Inc.) and continued weak performance from consumer staples stocks – one of the worst-performance sectors of the past year – have also contributed to this weaker sentiment.

Bullish sentiment towards small cap Canadian equities wilted, with the number of bulls falling from 62% of managers to 47% in the latest quarter, and bears rising six percentage points to nearly one-third of managers.

Sentiment towards Canadian bonds was revived somewhat this quarter, with 18% of managers now bullish versus only 6% last quarter. With cash offering near-zero returns, Canadian bonds may offer an attractive middle ground. High-yield bonds, meanwhile, have divided manager opinion: roughly one-third bullish, one-third bearish, and one-third neutral.

A solid 64% of investment managers remain bullish towards emerging market equities this quarter, and bears have fallen from 28% to just 15%.

Bullish sentiment towards U.S. and EAFE equities slipped to 44% and 47% respectively in the latest quarter.

The majority of investment managers are content with equity market valuations. Fifty-six per cent consider stocks to be fairly valued, and 17% say it is undervalued. About one-in-four express concern that it is overvalued. Only 6% of managers are bullish towards holding cash.

IE