With Canada’s financial markets being buffeted by concerns about Europe’s financial situation, Canadian investment managers have become increasingly bullish on Canadian equities as valuations have fallen, according to the latest Russell Investment Manager Outlook.

According to the second quarter outlook, 70% of investment managers surveyed are bullish on Canadian equities, while only 25% are bearish. By comparison, 56% were bullish in the first quarter and only 43% were bullish a year ago at this time.

“The sell-off in April and May has improved valuations and that has led to increased bullishness in Canadian stocks,” says Greg Nott, chief investment officer, Russell Investments Canada Ltd. “In addition, despite gaining in the first quarter, Canadian equities lagged their global counterparts in that period, making their relative valuations even more attractive.”

Assessing the Canadian market as a whole, 73% of investment managers say it is undervalued. That is a big shift from the previous quarter, when only 17% of investment managers thought the Canadian market was undervalued.

In terms of asset terms of asset classes, investment managers are relatively bearish on Canadian high yield bonds, with only 11% of managers holding a favorable outlook on that asset class compared to 29% in the first quarter.

For Canadian bonds, bullish sentiment has risen slightly, but the overall outlook remains bearish. Bulls rose to 20% from 12%, while bears slipped from 65% to 71%.

Sentiment is also generally positive on U.S. equities, with 65% of investment managers indicating they have a positive outlook for that asset class. However, this is down from 72% in the first quarter. By contrast investors have become far more cautious on emerging markets, with only 40% bullish and 35% bearish on the outlook for that region.

Only 25% of investment managers have a positive outlook on EAFE equities, down from 44% in the first quarter. Meanwhile 40% are bearish on the region, a significant increase from the 11% who were bearish in the first quarter.

Among sectors, investors remain generally bullish on energy and bearish on utilities as they have been for several quarters. However, bullishness on industrials has risen dramatically, with 74% of investment managers positive on the outlook for that sector compared to only 33% in the first quarter. Bearishness has fallen to 11% compared to 20%.

The outlook was conducted between May 24 and June 4.