Canadian investment managers struck a cautious pose in the latest Canadian investment manager outlook, a quarterly poll of investment managers conducted by Russell Investment Group, as bullish sentiment dropped across the board for all categories of equities other than utilities, and for the broader market as well.

Manager support toward Canadian equities continued to deteriorate, as bulls slipped to a very low 15%, the lowest percentage this quarter for any equity class including emerging markets.

“Canadian investment managers are growing increasingly cautious and have a renewed appreciation for risk and volatility,” says Tim Hicks, chief investment officer, Russell Canada. “A globally-coordinated contraction in liquidity is underway, as central banks from Asia to America make known their intention to further raise interest rates. The extent of monetary tightening is still an open question, and that uncertainty is affecting the outlook for stocks and especially those sectors sensitive to rising interest rates.”

The percentage of managers who see the market as undervalued slipped to just 6% while those who see the market as overvalued increased 5 percentage points to 46%. Managers hold this pessimistic view even as market valuations deteriorated significantly. This quarter’s Russell survey was completed in the midst of a sell-off in global equity markets that saw many regions decline 10% or more from their April peaks, with emerging markets hit the hardest.

All categories of equities suffered in this survey, and sectors sensitive to rising interest rates and discretionary consumer spending led the decline. Two of the largest drops in bullish sentiment were in extremely interest-sensitive sectors — Financials fell 32 percentage points to 32% bullish, and Telecom fell 29 percentage points to 32%. Investment managers lowered their bullish sentiment toward both developed and emerging markets by 20 percentage points, a dramatic decline also triggered by investor reaction to central bank tightening.

“The managers are playing defense and seeking safety until the future course of the economy becomes clearer,” said Hicks. “Consumer staples, a typically defensive sector, garnered the most support as investment managers believe that consumers will still need staple supplies, even in a slowing economy.”

A surprising result in the survey was the modest change in sentiment towards the materials sector, despite the sharp sell-off in many commodities near the end of the second quarter. Manager support of materials declined only four percentage points to 32%, compared to the 16 percentage point drop this sector experienced last quarter. In addition there was little change in the positive view of the Canadian dollar as compared to the U.S. dollar, as manager bullishness rose one percentage point to 45%.

Only one-third of the manager survey respondents see the impact of a rising Canadian dollar as a net negative on the economy. Despite the concerns raised by others, a majority of Canadian investment managers do not seem to consider the rise in the dollar a serious threat to the overall economy.

Canadian bonds showed the most dramatic turn in the survey. The bearish camp shrunk by 40 percentage points to 32% while the bulls increased by 16 to 23%. While sentiment still remains tilted towards the bears, the turn in support would indicate managers are seeing some value returning to bonds, especially relative to equities.