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Canadian advisors expect Canadian and U.S. equities to continue breaking record highs in the first quarter of 2017, reveals a survey by Horizons ETFs.

Read: Were they right? Geopolitical fears derail market call

Bullish calls

The highest bullish sentiment was for the S&P/TSX 60, with 69% bullish on broad Canadian equities going into the fourth quarter. The index generated more than a 21% return (on a total return basis), and 5.6% in the last quarter alone.

On a sector basis, 56% of advisors are bullish on the S&P/TSX Capped Financials Index, up more than 11.5% in Q4. Financials across North America have rallied since Trump’s election in anticipation of less regulation, rising interest rates and a generally positive outlook for consumer growth and spending.

The other key driver for Canadian equities is rising energy prices. A strong majority of advisors (57%) continue to be bullish on crude oil, and 68% are bullish on energy equity prices as represented by the S&P/TSX Capped Energy Index.

Read: Oil leads positive outlook for commodities

But bullish sentiment declined dramatically on natural gas prices, dropping to 48% from 55% last quarter, despite the fact that natural gas prices rose 28.1% last quarter. Regardless, energy equities have benefited from rising crude and natural gas prices, which generated an 11.1% return during the last quarter for the S&P/TSX Capped Energy Index.

“The negative sentiment on natural gas could be a result of the dramatic rise in gas prices last quarter, so we would need the second half of winter to be much colder to drive those prices higher,” says Steven Hawkins, president and co-CEO at Horizons ETFs, in a release.

About two-thirds (65%) of advisors are bullish on the prospects for the S&P 500 Index. Bullish sentiment is also strong for the NASDAQ-100 Index (62% of advisors), which offered about a 2.6% return (in CAD terms).

“The S&P 500 Index has a trailing P/E of more than 25, which is one of its highest valuation levels ever. Fundamentally, the U.S. economy is on much better footing than most other developed nations, but the prospect of a pullback from lofty valuations and the potential cooling of the Trump rally loom large,” says Hawkins. “Still, for Canadian ETF investors, the U.S. market remains a key investment target, particularly for diversification reasons, since it offers exposure to sectors such as technology and healthcare, which have a much lower representation in Canada.”

Bearish on bonds, the loonie and gold

Only 27% of advisors are bullish on the U.S. 7-10-Year Treasury Bond Index (48% were bearish). This asset class lost 5.8% (in CAD terms) last quarter, more than a year’s worth of yield.

“More than half of inflows in the ETF industry last year had been to bonds,” says Hawkins. “In December, we saw that trend slow down but flows into fixed income ETFs were still positive. At a certain point, if interest rates on both sides of the border continue to rise, we may see advisors becoming net sellers of fixed income, or at least opting for strategies that offer more interest rate protection.”

When it comes to the Canadian versus American dollar trade, only 26% of advisors report being bullish on the loonie heading into Q1, while 45% are bearish.

A key driver of this sentiment is probably the Fed’s plan to raise interest rates, where Canada could see flat or maybe decreasing interest rates in 2017. That creates a fairly big rate differential that can motivate currency investors to hold the U.S. dollar.

Bullish sentiment on gold bullion declined to 32% from 49% last quarter, and sentiment on gold equities — the best-performing sector in the Canadian market last year — declined to 30% from 48%. Gold bullion lost about 12% last quarter, and gold equities, as represented by the S&P/TSX Global Gold Index, declined about 18.1%.

Likewise, bullish sentiment declined on emerging markets last quarter, to 43% from 53%, likely due to the fact that Trump’s “America First” policy talk could have a direct impact on emerging market exports. The MSCI Emerging Markets Index lost about 1.7% last quarter, but is already up about 3.8% in early 2017 (as of January 27, 2017).

Read: How to capitalize on market fear

“Concerns about risk in the emerging markets might be overblown,” says Hawkins. “This level of negative sentiment overlooks some of the key growth drivers in China and other energy-dependent emerging markets.”

See full survey results here.

Originally published on Advisor.ca
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