Even as equity markets have yet to produce a sustained rally in the first few months of 2009, Canadian investment managers have become increasingly bullish.

According to the latest quarterly Russell Investment Manager Outlook survey, only one-in-10 managers believe the Canadian market is overvalued, and 70% say stocks are undervalued, with the energy, materials, and financial services sectors offering the most attractive prospects.

“Except for emerging markets, Canadian equities were the worst-performing asset class in the final quarter of 2008. Given the bargain-basement valuations that resulted, it’s fitting that a solid 60% say they are now bullish on Canadian equities,” says Sadiq Adatia, chief investment officer of Russell Investments Canada Ltd.

On a sector basis, 76% of the managers surveyed are bullish towards the energy sector, and only 15% see more downside potential.

“Oil trades well below the price at which most producers are profitable, and any up-tick in demand could lead to supply pressure and higher share prices,” explains Adatia.

“A similar story exists in the materials sector. Aside from gold, inventories of commodities are depleted and production has slowed or stopped. Past concerns about inventory should dissolve rapidly at the first sign of stronger demand, with positive implications for the Canadian market,” he says.

As a result, bullishness towards the materials sector is up from 44% to 58%, and bears have been cut in half to only 21%.

Bullish sentiment towards the financial services sector has jumped to 61% of investment managers, with less than one-in-five saying they are bearish.

Meanwhile, bullish sentiment towards the telecom sector has declined sharply from 52% to 39%.

“Although telecoms provide dividends that are attractive in choppy markets, investment managers may now be drawn to more growth-oriented sectors,” says Adatia.

“A similar calculus is likely behind the drop in bullishness towards utilities, from 48% to 24%,” he adds.

Canadian bonds have fallen out of favour with investment managers, with the number of bears rising from 35% to 49%, and bulls slipping from 38% to just 27%. Bonds outperformed equities by roughly 40% in 2008.

In the survey, Russell also asked investment managers to identify which indicator they are most relying on to gauge a recovery in financial markets.

“Almost two-thirds named stability in the U.S. housing market,” says Adatia. “The remaining responses were spread out among a wide range of indicators, including an improved consumer outlook, a narrowing of the spread between Treasuries and corporate bonds, stronger commodity prices, and further government intervention or stimulus.”

The outlook for U.S. equities weakened this quarter, with the number of bullish managers slipping from 60% to 51%. Bears, however, remained unchanged at 24%, indicating that some former bulls have simply moved to a neutral outlook.

Sentiment towards overseas equities slipped this quarter, with bulls declining from 50% of investment managers to 43%, and bears increasing slightly to 30%. As with the U.S., it appears that some bulls have moved into neutral territory.

IE