Over 50% of Canadian investment managers are now bullish on the Canadian dollar compared to 25% a quarter ago, according to the latest quarterly poll of Canadian investment managers conducted by Russell Investments Canada.

“The majority of Canadian investment managers surveyed have high expectations for the Canadian dollar, believe the Canadian equity market is fairly valued and are generally bullish on equities,” says Tim Hicks, chief investment officer, Russell Investments. “Overall 68% of managers believe the Canadian equity market is fairly valued, which is 19% higher than a year ago.”

“Meanwhile, sentiment for the bond market turned sharply negative in the second quarter and the number of bullish bond managers fell 24% to just six%,” says Hicks. “With yields rising on government-issued bonds, high-yield bonds may continue to struggle.”

Adds Hicks, “These changes are likely due in part to the continued strength of the Canadian economy, the persistence of inflationary signals and strong hints from the Bank of Canada that further rate hikes are in the offing. Our third quarter survey results in September should indicate the future for interest rates and reveal whether or not fixed income pessimism is here to stay.”

Although private equity deals have been grabbing headlines, by a ratio of about two to one, investment managers are concerned about extreme valuations, excessive leverage and a general lack of appealing trading opportunities. Managers were evenly split on whether these deals are having a positive or negative effect on corporate restructurings.

Two-thirds of investment managers showed little enthusiasm about the Canadian real estate sector. “There has been so much publicity regarding the glut of supply and high-risk mortgage lending problems in the U.S.,” says Hicks, “and with the strong likelihood of higher financing costs, both south and north of the border, managers are more bearish about Canadian real estate.”

Sentiment for the telecom sector also deteriorated significantly with bullishness dropping from 65% to 39% of managers who see little remaining upside potential for the telecom sector.

Bullishness towards the energy sector surged from 24% to 55%. In Russell Investments’ previous survey, more than half of the investment managers said energy prices were the single biggest threat to the Canadian equity market. Given their current bullishness on the energy sector, managers appear to be in agreement with the Bank of Canada’s high growth outlook.

Managers remain bullish on EAFE equities which increased from 64% to 68%, despite several European central banks raising interest rates and others appearing ready to do so. Although volatility was relatively high in world equity markets, managers judged the market as having a solid fundamental footing. A reversal in trends from the last quarter appeared in attitudes towards U.S. equities as bullishness dropped from 58% to 41; bearish attitudes rose from 14% to 27%.