Although financial advisors in Canada are feeling bullish about Canadian equities, especially those in the energy sector, that enthusiasm does not translate into overly positive thoughts toward the Canadian dollar (C$) or gold-related equities, according Toronto-based Horizons ETFs Management (Canada) Inc.’s second quarter (Q2) advisor sentiment survey.
The survey, which polls advisors for their expectations of returns on 14 asset classes for Q2, found that more than half (58%) of advisors were bullish on broad Canadian equities thanks to a rally in energy and materials equities in the second half of Q1, which led to a return of 3.45% from the S&P/TSX 60 index.
“Canada had a roaring comeback in Q1, largely due to oil prices, which jumped more than 50% from the depths of January,” says Steve Hawkins, co-CEO, Horizons ETFs, in a statement. “Advisors likely perceived this as good news for the broader Canadian economy as a whole, which relies heavily on energy prices for economic growth, particularly in the Western provinces.”
Bullish sentiment on energy stocks rose to 54% in Q2 from 40% in Q1 and was the highest increase in advisor sentiment among the 14 asset classes. Bullish sentiment also increased on crude oil to 50% in Q2 from 45% in Q1. The S&P/TSX capped energy index finished the quarter with a return of 6.62%.
“Crude oil prices are again the big driver of returns for energy stocks, and [prices of West Texas Intermediate oil] was up by 3.51% last quarter, rallying more than 50% from its lows around $26 a barrel during the depths of February,” says Hawkins.
However, that bullish sentiment was not strong enough to translate into high enthusiasm for the loonie. Only 28% of advisors are bullish on Canadian currency in Q2.
Although the loonie rallied in Q1, this is not a surprising result as the future is still uncertain when it involves energy prices and the direction of interest rates in the U.S., Hawkins suggests.
Meanwhile, there’s a significant decline of advisors who are bullish on U.S. equities. For example, 53% say they are bullish on the S&P 500 composite index in Q2, which is down from 70% in Q1.
“The decline in bullish sentiment on U.S. equities is likely a combination of two factors: the strong relative performance of Canadian equities and the rally of the C$,” says Hawkins. “In U.S. dollars, the S&P 500 was up slightly at 0.77%, but hedging for Canadian currency, it declined 5.44%. Not only do investors have to get the directional call right in U.S. equities, but they have to get the currency call right as well.”
In addition to U.S. equities, less than one-quarter (22%) of advisors are bullish and 43% are neutral on U.S. treasuries. Specifically, the rise of the C$ vs the U.S. dollar have made investing in this asset class a little trickier for Canadian investors, says Hawkins.
Sentiment on volatility, as represented by the S&P 500 VIX short-term futures index, was mixed with only 41% of advisors being bullish and 31% stating they were neutral on the asset class.
More than one-third of advisors (35%) were bullish on the prospects for gold. The S&P/TSX capped gold index delivered a return of 40.69% in Q1 while the price of gold bullion was up 16.14%.
It may take more than one quarter of positive returns for this asset class to regain advisors’ confidence after being among the worst-performing asset classes for the past two years, according to Hawkins.
But the global deflationary macroeconomic environment, including negative interest rates in Europe and Japan, usually signals a favourable move in gold, he adds.
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