Fund managers favour equities in 2012: survey

In fact, the survey found that one-third of managers surveyed expect a gain of 10% or more, and 77% expect a positive rate of return. Only six per cent of managers expect a decline of up to 10%, and the same number expect a decline of 10% or more.

While the survey found that equity market sentiment was up across the board, emerging markets saw the greatest change, with bulls rising from 50% to 69% of managers, and bears falling by half to just 13% of managers.

“This positive sentiment may be influenced by several factors, including the fact that emerging markets’ valuations have fallen to more attractive levels in recent months,” says Greg Nott, chief investment officer of Russell Investment Canada Ltd. “As well, there is an expectation that emerging markets will outperform the developed world, in light of the continued turmoil in Europe, and the struggling EAFE region.”

Nott says that this positive emerging markets sentiment has encouraging implications for the Canadian market. “If emerging economies do well, it tends to create demand for oil and base metals, which provides support for the Canadian equities market.”

In fact, the survey found that sentiment towards the Canadian energy sector leapt from 61% bullish to 80% this quarter. “Energy has had a bit of a rough ride this year, but has found firmer footing of late, as oil has rebounded to near the $100 per barrel level,” adds Nott.

The materials sector also showed a large positive change in sentiment, with the number of bullish managers rising from 43 to 60%. According to Nott, “While improved base metals prices may be part of the story, investors remain enamored with gold, as it is viewed by many as a safe haven asset, particularly with the current uncertainty around the European debt situation.”

As a result of the strong rebound in energy and materials, most managers view Canada as an attractive market, with bulls standing at 63% and bears at 25%. When asked their views on the current valuation of Canadian equities, 55% of managers responded that the market is undervalued and 45% indicated that it is fairly valued. “It is indeed a rare occurrence to see not a single manager express the opinion that Canadian equities are overvalued,” says Nott.

The outlook for U.S. equities improved slightly, with bulls up a few points to 50% and bears down a few points to 25%. “We continue to see improving economic data from the U.S., which is coming off an earnings season that delivered more positive surprises than negative ones,” says Nott. “At the same time it is also worth noting that the U.S. equity performance beat virtually every other world market in October and November in Canadian dollar terms.”

On the fixed income side, the survey found that the outlook for Canadian bonds is clearly not positive, as Canadian bond bears declined from 67% of managers to 44%. With bulls sitting at 19%, the outlook is closer to neutral than it was a year ago when more robust economic growth expectations had most investors bracing for rate increases.

The outlook for EAFE markets remains bleak, with just 38% of managers bullish and 44% bearish. The continued uncertainty in Europe has lead to a consensus that the continent is entering a mild recession, with some analysts of the view that we will see further damage to the banking sector and a break-up of the Eurozone. “At Russell, while we believe that Europe’s troubles will continue to cause volatility in the asset markets, the Eurozone will remain intact and the odds of a recession in the region reaching North American shores is low,” says Nott.

Looking at individual sectors of the Canadian equity market, managers’ increasing optimism may be seen in a general shift in sentiment away from defensive sectors and towards more cyclical areas of the market. For example, the number of bears increased sharply towards the slow-but-steady telecom and utility sectors (67 and 53% bearish respectively), while bullishness rose significantly for cyclical sectors including energy, materials and consumer discretionary (at 80, 60 and 40% bullish respectively).

Long the darling of investment managers, sentiment towards financial services continued to deteriorate likely weighed down by the increasing risk profile of the global banking sector and a struggling insurance sector that has been under pressure from lower interest rates and higher regulatory hurdles. Bulls have fallen 18% to just 29% of managers, and bears have climbed from 36 to 43%.

The Russell Investment Manager Outlook is completed and distributed at the end of each quarter. This report includes responses from investment managers with a variety of investment focuses. The most recent survey was conducted between November 15 and 25.