As a result, bears now dominate opinion for the first time in several quarters in the report by Russell Investments.

Even with the increase in bearishness, 77% of investment managers still expect Canadian equities to post flat to positive returns in 2008.

“It seems that many managers are cautiously waiting to see how the sub-prime credit crunch and rumours of a U.S. recession will unfold, while at the same time betting that the Canadian market will be in a position to move ahead over the next 12 months,” said Timothy Hicks, chief investment officer, Russell Investments Canada, in a release.

“In our opinion, the current spate of negative sentiment in the market is fueled at least as much by a sense of uncertainty as by any serious deterioration of economic fundamentals. Over the coming quarters, the true dimensions of the sub-prime credit crunch will be revealed, and market watchers will have a clearer picture of whether we are indeed facing the possibility of an economic contraction, or merely a slower pace of growth.”

Sub-prime lending woes and troubling economic indicators have triggered a decline in bullishness towards equities among Canadian investment managers. However, bullishness towards Canadian fixed income rose, indicating that many managers believe bonds have found a level of support following the sharp correction of earlier in the year. Bullishness towards Canadian bonds increased from only 15% of managers to a full 39% on the heels of a sharp correction earlier this year.

Bearishness for U.S. equities has grown in number from 27% to 42%. After a lengthy stint as managers’ most favoured market, bullishness towards EAFE equities plummeted from 67% to 37%, and the number expressing optimism for emerging markets fell from 52% to 43%.

“The shift to a more bearish stance on equities comes amid not only the credit crunch, but also a string of negative indicators. This includes evidence of a slowing global economy, downward earnings growth revisions in both Canada and the U.S., and a diminished corporate profit picture. Despite aggressive measures by central banks to cut key lending rates and inject liquidity into the market, investment managers appear to be approaching the market with caution,” said Hicks.