Advisors turn bearish on Canadian equities: survey

The Q2 survey asked Canadian advisors to share their outlook on 15 distinct asset classes and express their sentiment — bullish, bearish or neutral — on the anticipated returns for these asset classes in second quarter of 2014.

Collectively, advisors were over 50 per cent bullish on only three of the 15 asset classes surveyed, which were S&P/TSX Capped Energy Index, S&P 500 Index and Nasdaq–100 Index.

In the Q2 survey, less than half (47 per cent) of the Canadian advisors surveyed expect Canadian stocks to deliver a positive return over the next quarter. This is a stark turnaround in sentiment compared to the onset of 2014, in which 74 per cent of advisors stated they were bullish on the S&P/TSX 60 Index’s performance for the first quarter.

A similar turnaround in outlook expectations was also seen in relation to U.S. stocks. Bullish sentiment on the S&P 500 for Q2 dropped to 53 per cent from 74 per cent in the Q1 survey. For the first quarter ended March 31, the S&P 500 delivered a modest 1.3 per cent return versus the 4.7 per cent the S&P/TSX 60 returned. While almost every equity category saw big declines in bullish sentiment, emerging markets experienced the most severe decline, where bullish sentiment dropped to 32 per cent from 71 per cent in the previous quarter.

“Advisors are adopting a ‘buyers beware’ attitude towards Canadian and U.S. equities since their current valuations remain on the high side after last year’s market rally,” says Howard Atkinson, president of Horizons ETFs.

“With growing credit concerns and slower than expected economic growth, their skepticism carries over to emerging markets, which have been an unloved asset class over the last 18 months. While sometimes this could indicate the potential for buying opportunities, this is the not the case — advisors clearly expect emerging market stocks to decline further,” Atkinson says.

Typically, when advisors have been bearish on stocks, they were bullish on gold. Bullish sentiment on gold bullion increased this quarter to 43 per cent from 32 per cent, following a 6.5 per cent return last quarter. Bullish sentiment on gold stocks saw a similar uptick rising to 42 per cent from 32 per cent following first quarter performance of the S&P/TSX Global Gold Index, which rose 15.6 per cent.

Bullish sentiment on energy stocks did hold relatively steady this quarter, after the S&P/TSX Capped Energy Index returned 8.8 per cent last quarter. Energy and gold stocks outperformed the financial sector, as represented by the S&P/TSX Capped Financials Index, which was only up 1.4 per cent. Sentiment on the financial index declined to 36 per cent for Q2 from 56 per cent in Q1.

Advisors have become much more positive about the future performance of the Canadian dollar versus the U.S. dollar. For Q2, one fifth of advisors were bullish about the Canadian dollar, whereas only 12 per cent were in Q1. Many more advisors stated they were neutral, which resulted in bearishness falling 30 per cent in Q2 to 49 per cent from 70 per cent.