Just over one quarter of Canadian investment managers are bullish on Canadian equities while well over one half are positive on non-Canadian equities, according to a survey released today by Russell Investment Group.

Compared to the 48% of the surveyed managers who were bullish on Canadian equities last quarter, only 28% held this view in the current survey.

“Managers are concerned over the current valuation of the Canadian market, and the reason for this increasingly negative view is clear – they have a decidedly bearish sentiment for both the energy and materials sectors,” says Tim Hicks, chief investment officer, Russell Canada. “The overall deterioration in sentiment for Canadian equities is understandable – Energy and Materials constitute over 40% of the Canadian market and have been responsible for much of the strong run in the market over the past two years.”

According to the latest Russell survey, 68% of respondent managers were bearish on Energy. In Materials, the slippage was a less dramatic but still significant 17 point increase in bearish sentiment to 43%.

“In contrast to their concerns about the Canadian market, the investment managers surveyed remain positive on non-Canadian equities, and well over half of the managers are bullish on US and non-North American equities,” says Hicks. “Over 50% of managers gave both categories bullish ratings, with EAFE – or the European, Australasia and Far East equities – favoured over U.S. by 65% to 57%.”

The most unequivocal result from the survey remains the negative view of Canadian fixed income. Of the managers surveyed, 72% are bearish overall on Canadian bonds and that number rises to 83% when asked specifically about high-yield bonds.

Investment managers were surprisingly unmoved by the removal of the Foreign Property Rule for registered accounts. In a result that seemed to indicate a fairly strong home bias, 42% of respondents suggested a range of 30%-40% as the recommended exposure to Canadian equities in a balanced mandate, which is fairly close to the average exposure of balanced funds before the lifting of the rule.

“Canada’s equity market represents about 3% of world market capitalization, but the managers appear to be recommending a heavily Canadian approach to asset allocation,” says Hicks. “Although there may be legitimate concerns over foreign currency exposure or an anticipation of increased correlations between equity markets, but the Canadian managers don’t seem eager to take full advantage of the diversification possibilities afforded by the removal of FPR.”

On a sector basis, Financials was again the most favored with 65% of managers expressing their bullishness for this sector. The managers also expressed a more upbeat outlook towards Industrials, Information Technology, Telecommunications and Health Care sectors. Across these four groups, bullish ratings increased between 13% and 18% while bearish scores declined in a range of 7% to 26%.

Russell conducted the current Investment Manager Outlook between March 5 and March 13, 2006. Responses to the survey are on a purely voluntary basis. Over 30 managers responded.