A majority of Canadian investment managers remain bullish on equities, despite volatility in the markets. Meanwhile, less than 7% of investment managers are bullish towards bonds and cash.

Those are among the views expressed in the latest Russell Investment Manager Outlook poll conducted by Russell Investments Canada Limited in late August and September.

“With bond yields hovering near record lows and rates only heading higher, we’ve seen more investors turn to dividend investments, which currently offer more attractive yields and greater long term return potential. The Russell Canadian Dividend Pool, for example, has returned close to 9% so far this quarter,” says Sadiq Adatia, chief investment officer of Russell Canada.

Bullish sentiment towards most equity sectors declined in the third quarter, reflecting a lower risk appetite among investment managers. The two exceptions were international equities and Canadian small cap stocks. Bullishness for Canadian equities slipped this quarter from 63% to 56%. Positive sentiment towards Canadian small cap stocks shot up nine points to 50% of managers this quarter.

“Despite the more challenging environment, managers still clearly believe equities are the most attractive asset class, although they are expressing some caution towards equities. For instance, Canada is still the most bullish equity market overall. With recent evidence of a housing slowdown and some cautionary comments on the earnings side, things in Canada might slow down, but the prospects for our market still remain better than most countries,” says Adatia.

“As for small caps, many of the companies in this group have strong balance sheets and high yields. There are a number of potential merger and acquisition targets in the small cap space, and we believe many of these firms could strongly outperform their large cap peers once a more normal risk appetite returns to the market.”

The proportion of investment managers who now believe broad market Canadian equities are undervalued has risen substantially this quarter, from 30% to 50%. Thirty-six percent believe the market is fairly valued, and only 14% believe Canadian stocks are overvalued.

“Looking at individual sectors, energy continues to find favour, with the number of bullish managers holding steady at 54%. Earnings have been solid, and there remains a compelling case for long-term energy price appreciation,” explains Adatia.

“On the other hand, financial services sentiment fell from 63% bullish to 46%. Manulife’s poor earnings report plus its earlier dividend cut continues to weigh on the sector. Meanwhile, banks have not increased dividends or generated much in the way of capital gains till the end of August. The recent Basel report may give some positive momentum to the sector going forward.”

The proportion of international bulls rose from just 33% last quarter to 44% this quarter, bringing sentiment closer in line with other equity markets. Meanwhile, forty-seven percent of managers are bullish towards emerging markets this quarter—a decline of 11% versus last quarter. U.S. equities took a hit, with bulls declining from 61% to 50%, yet only one-in-four managers say they are bearish towards U.S. equities.

“In our view, European markets are likely to remain muted in the near-term with investment inflows slowing to a trickle. We believe these markets need a positive economic surprise to re-ignite,” says Adatia.

“As for emerging markets, the growth numbers are still very respectable — they’re just not as high as some investment managers had hoped. Emerging markets remain, in our view, the growth engine of global markets.”

Opinions vary as to how much rates will rise in the next 12 months. One in-four managers missed the mark, predicting no rate increases just weeks before the 25bps increase that took place on September 8th. Nineteen per cent think there will be no further increase, 38% predict an increase of 50bps, and 19% see an increase of 75bps or more. Not a single manager predicts rate cuts over the period.

“We view investment managers’ current caution regarding the overall market as temporary, and see several potential catalysts for renewed optimism, such as companies using the ample cash on their balance sheets for dividend hikes, acquisitions, and share repurchases,” says Adatia.

“We continue to believe that remaining fully invested and properly diversified is the best way to benefit from near term market pullbacks and maximize gains over the long term.”

Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company, headquartered in Tacoma, Wash.

IE