A majority of investment managers see further upside potential for Canadian equities, despite a rally that has seen double-digit gains in the S&P/TSX composite index so far this year.

A solid 45% consider Canadian equities to be undervalued and only one-in-five think the market has become overvalued, according to the latest quarterly Russell Investment Manager Outlook poll, released Monday.

“An increased appetite for risk is a common theme this quarter. The most notable evidence is the outlook for cash. Not long ago, it was the safe haven of choice for many managers, with more than one third saying they are bullish towards the asset class, despite the fact that returns were very low, and had even dipped temporarily below zero for U.S. treasuries,” says Sadiq Adatia, chief investment officer of Russell Investments Canada Ltd.

According to the Russell survey only 8% of managers say they are still bullish towards cash, and fully 61% are bearish, indicating that stocks and bonds are once again seen as offering rewards commensurate with their higher risk profile.

As the TSX has set successive new highs for the year, investment managers have remained overwhelmingly bullish towards broad market Canadian equities. The number of bullish managers increased from 60% to 63% this quarter, while the number of bears increased four points to just 26%.
The “big three” sectors of the domestic market continue to lead in positive sentiment. Investment managers remain optimistic about the energy sector, with 74% calling themselves bullish.

“The bullishness towards energy comes as little surprise, as oil prices have experienced a steady ascent in recent months, following a period of constrained supply,” explains Adatia.

Seventy per cent of investment managers say they are bullish towards the financial services sector, as Canadian banks have stood out as the world’s strongest in recent quarters, maintaining steady dividends and respectable earnings throughout the financial crisis.

The outlook for the materials sector also remains upbeat, with 64% of managers saying they are bullish.

“Excluding gold, this sector was deeply depressed in recent quarters, and appears to be staging a comeback on the widely-anticipated resumption of global growth within the next few quarters,” says Adatia.

Another sign of rising confidence is the preference for high-yield bonds over Canadian government bonds. Only 21% of managers remain bullish towards government issues, and 55% are now bearish. However, the number of managers favouring high-yield bonds rocketed from 31% to 54% of managers, while bears dropped from 42% to 34%.

Emerging market equities — which posted some of the worst performance during the financial crisis == are another area where attitudes towards risk appear to have changed. The number of bullish investment managers shot up from 43% to 67% this quarter, and bears slid from 40% to 31%.

IE