Despite a dismal global outlook, Canadians equities are doing well.
Valuations are falling, which has further strengthened home bias among Canadian investment managers, says the latest Russell Canadian Investment Manager Outlook.
In the study, which polled senior-level Canadian investment decision-makers, 86% of participants admitted headline or macro-event risk were their greatest challenges.
Consistent with that outlook, 70% were bullish on Canadian equities, up from 56% in the first quarter of 2012 and 43% this time last year.
“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 Limited. “In addition, despite gaining in the first quarter, Canadian equities lagged their global counterparts in that period, making their relative valuations even more attractive.”
Managers have only recently taken note: While 73% of participants said the Canadian market was undervalued, only 17% believed that the previous quarter.
Their outlook for high-yield bonds, however, grew more bearish: only 11% managers said they look at the asset class favourably, down from 29% in the first quarter. Real estate, with only 6% bullish, lost the most ground of all asset classes .
On the fixed-income side, bullish sentiment rose slightly, to 20% from 12%, but the overall outlook remains bearish (71%).
In the foreign equities markets, U.S. equities continued to enjoy positive sentiment. By contrast, the poor recent performance of emerging-markets stocks made investors more defensive on the asset class, with only 40% bullish and 35% bearish.
“Investors who had expected emerging markets to continue performing better than developed markets may have been disappointed by the Russell Emerging Markets Index’s 19% decline in 2011,” says Nott.
With Europe still tangled up in debt woes and political instability, sentiment toward the EAFE region grew more bearish, to 40% from just 11% in the first quarter. The study also found 25% of respondents had a positive outlook on EAFE equities, down from 44% in the first quarter.
Among sectors, energy stocks continued to dominate (63% bullish), as they did over the past several quarters. However, industrials gained the most investor sentiment: 74% of investment managers were bullish on the sector, compared to only 33% in the first quarter.
“Lower prices for oil and other inputs have investors looking more favourably on the industrials sector, which is dominated by transportation companies,” says Nott. “The country’s railroads, which are major components of the transportation sector, are strongly influenced by the state of the U.S. economy, which was viewed as gradually improving.”
Technology (58%) and financial services (53%) were the other most-favoured sectors. Utilities (53%), healthcare (33%) and communications services (32%) were least popular.
These results may provide some hope to investors at a time when money managers are increasingly admitting there are no good places for clients to invest.