After the rally in Canadian stocks this summer, Canadian investment managers are less bullish about domestic securities and are finding other global markets increasingly attractive, according to the latest Russell Canadian Investment Manager Outlook.
The vast majority of those surveyed between September 4 and 14 now feel Canada’s stock market is fairly valued.
According to the third-quarter outlook, Canadian investment managers surveyed are most bullish on the outlook for emerging markets equities, with 62% holding a favorable outlook on that asset class, compared to only 40% in the previous quarter.
Meanwhile, the European Central Bank’s (ECB) purchase of sovereign bonds in order to stave off a financial crisis in Europe has improved sentiment towards that region, with 38% of investment managers now bullish on EAFE equities, compared to only 25% in the previous quarter. Bearishness on the region has fallen sharply, to 15% of managers compared to 40% who had an unfavorable outlook on EAFE equities in the previous quarter.
“ECB policy action has reduced the number of bears on Europe,” said Greg Nott, chief investment officer, Russell Investments Canada Ltd., adding that while most managers no longer had a negative outlook on the region, they were still somewhat wary. “The risk of the Euro zone falling apart has been substantially reduced,” he said. “But is it clear sailing from now on? Certainly not.”
Still, the ECB’s bond-purchasing program has investment managers feeling a lot more positive on the outlook for Europe. Of those surveyed, 57% felt that developments in the Euro zone debt crisis would be a positive for active managers over the next year, while only 29% felt such developments would be a negative factor.
Managers are also split over China’s slower economic growth. While 43% see China’s economic situation as a positive for the markets, implying they see its economy stabilizing, 29% see it as a negative, indicating they believe it will continue to decelerate.
The so-called U.S. “fiscal cliff” was seen as the biggest challenge facing investment managers over the next 12 months, the survey showed. Unless the U.S. Congress takes action, the “fiscal cliff” could lead to $600 billion in spending cuts and tax increases starting in January 2013 that could negatively impact the economy by between 2% to 4%.
Meanwhile, although a majority (54%) of managers surveyed remain bullish on Canadian equities; that is down from 70% in the second quarter. The S&P/TSX Composite Index gained 4.6% in the three months since the previous IMO survey was conducted. That rally was also reflected in the managers’ view on market valuation, where consensus moved from viewing the market as undervalued, to viewing the market as now being fairly valued. While only 13% believed the Canadian stock market was fairly valued in the second quarter, 75% characterize it as fairly valued in the third quarter. Only 25% believe the market is now undervalued, compared to 73% who felt that way in the previous quarter. Similarly, 54% of managers have a favorable outlook on U.S. equities, but that is down from 65% the previous quarter. U.S. equities rose 2.8% in the three months since the last survey, and touched multi-year highs in the first half of September.
Canadian investment managers have also become less bullish on the outlook for the Canadian dollar, which has appreciated by 4.8% against the U.S. currency in 2012 and is currently above parity. Of the managers surveyed, only 14% are bullish on the Canadian dollar, down from 45% in the previous quarter. Bearishness increased to 43% of managers from 35% in the second quarter.
In contrast, bullishness on Canadian fixed-income securities has increased in the most recent quarter. Although bullishness on Canadian bonds increased to 36% from 20%, the bearish view on Canadian fixed-income issues continues to dominate at 64%. However, in the case of high-yield bonds, bullishness swung to 43% from 11% and bearishness fell to 7% from 61%.
In terms of sector views, investment managers remain quite bullish on energy as they have been all year. In the latest survey, 67% had a positive outlook on energy, compared to 63% in the second quarter and 73% in the first quarter. Managers are also relatively bullish on the outlook for information technology, financial services, industrials, consumer discretionary and materials stocks and relatively bearish on health care, telecommunication services, consumer staples and utilities. Sentiment was little-changed from the second quarter, except in the case of consumer discretionary, where bearishness slid to 8% from 26%, in utilities, where bullishness rose to 25% from 11% and in industrials, where bullishness slid to 50% from 74%.