Investment managers remain enthusiastic about the prospects for Canadian stocks even as the Canadian equity market continues to forge ahead in the third quarter of 2009, according to the latest quarterly Russell Investment Manager Outlook.

“Investment managers appear to be willing to take on more risk these days with the bullish outlook for equities strong, bears decreasing in number, and sentiment towards bonds dwindling,” says Sadiq S. Adatia, Chief Investment Officer of Russell Investments Canada Ltd.

“Even if there’s some disagreement as to how far and how fast markets can keep climbing, relatively few managers appear worried about further downside potential.”

The Canadian market has risen fastest among the world’s developed economies this year, but that hasn’t dimmed the optimism of most investment managers. A solid 65% remain bullish towards broad market Canadian equities, and bears have dropped from 26% in the second quarter to just 18% in the third quarter of 2009.

To be fair, nearly a quarter of investment managers say the Canadian market is now overvalued, which is a slight increase from last quarter, and only 12% says it is undervalued, which is a significant drop from 45% three months ago. Nonetheless, 65% rate the market as fairly valued.

Reviewing domestic market sectors, industrials, now lead in bullish sentiment with 73% of managers expressing a positive outlook. Industrials are seen by some as a conservative choice in the early stages of economic recovery.

The energy and financial sectors are still favourites, garnering bullish sentiment from 67% and 64% of managers respectively. Financial services bears have dropped 27% to 18% as Canada’s financial institutions have remained solid throughout the financial crisis and even posted strong earnings.

Consumer discretionary stocks saw a large increase in bulls from 47 to 66% of managers.

The information technology sector, which is largely a proxy for Research in Motion (RIM), remains positive with 63% of managers bullish and 23% bearish. These sentiments were expressed before RIM reported a weaker-than-expected sales outlook, alongside a slight dip in fiscal second-quarter earnings.

A solid 48% of managers are now bullish towards telecom shares, a sector with strong earnings and dividends, if somewhat unspectacular growth prospects.

Bullish sentiment towards materials slipped from 64% to 57%, as gold stocks have generally lagged the market, despite gold prices being near $1,000 US/oz. Consumer staples and utilities both saw bullishness increase, perhaps as cautiously optimistic managers move into relatively defensive equities positions.

Meanwhile, Canadian bonds are finding very few takers as 63% of managers are bearish on fixed income.

In the United States, bulls are up a few points from last quarter to 49%, and bears are down several points to 21%.

Looking abroad, EAFE equities have lagged Canadian this year, and investment managers seem to be expecting some catch-up: Bullishness jumped from 43% last quarter to 56% in the third quarter, and bearishness dropped from 35% to 15%.

Emerging markets lead the way as 66% of managers were bullish and only 28% bearish.

Looking ahead, more than two-thirds of investment managers expect inflation in Canada to remain below 2% by the end of 2010. That means one third do expect inflation to rise, and in the longer-term, higher inflation seems to be a likely risk.

IE