If you’re wondering how Canada’s investment managers are feeling about the country’s economic future, Morningstar Canada can sum it up in two words: cautiously optimistic.

In the research company’s first Morningstar Investment Manager Survey in four years, the overall consensus among the 23 investment firms surveyed was that North America’s economy should improve in the next five years, though how much is up for debate.

“The managers are saying that there are risks in the market, a slowdown on U.S. consumer spending, and inflation might continue to increase, but they’re also optimistic on equity,” says Morningstar analyst Jordan Benincasa.

“People are uncertain,” adds Dan Hallett, president of Dan Hallett and Associates. “There’s still an overall optimism, but it’s more cautious than it would be in a more normal environment.”

One area where investment managers disagreed was on the price of oil. Most managers — 48% — predicted a barrel of oil will settle between $70 and $90 in three to five years. However, nearly a third of those surveyed also responded that oil will rise to $130, while 22% said it will end up between $90 and $110.

“Oil has perplexed a lot people,” says Hallett. “Whenever you get to extreme levels of something, there’s a large contingent of people who lay out the case for why the current trend is going to continue. You also have others who are advocating caution as prices march higher and higher, and you’re seeing that reflected here as well. Expectations are all over the place.”

Managers are also taking a precarious view of Canadian equity. Although it’s been a strong area for a number of years, only 15% of managers said the market looks most attractive over the next three to five years, while 31% of those surveyed thought the U.S. market would be the best place to invest.

Part of the reason for America’s attractiveness is that, with the States’ market downturn, bargains have popped up. Couple that with a feeling that the Canadian market’s strong performance could be nearing an end and you have many managers looking to park their dollars down south.

“What I’ve been hearing from fund managers for some time is that there are a lot of good values generally, but in the U.S. in particular,” says Hallett.

“Managers are cautiously optimistic about the Canadian market,” adds Benincasa. “It’s not quite bearish, but they’re not pounding at the Canadian equity market table either.”

Although managers aren’t salivating over Canadian equity anymore, they remain bullish on energy, financial and material stocks, which make up most of the S&P/TSX.

Even more contradictory is that financials, energy and materials are three sectors a number of managers felt would perform the worst over the next five years. Twenty-three percent of managers expect consumer discretionary sector to be the worst performing sector in the next 12 months; 17% said energy would be the top underperformer over the next three to five years.

“This just tells you that there is a bit more uncertainty,” says Hallett, adding that the Morningstar results for worst performing sector are so spread out between all the options that it’s hard to draw a definitive conclusion on which sector will be the hardest hit.

The survey also asked investment managers from which market they expect to see the best performance. India was ranked number one with 24% of managers expecting the country to perform well in the next 12 months; 29% thought it would have the most growth in the next three to five years.

That’s somewhat surprising, considering China is usually the first country that comes to mind in the emerging markets story. In the short term, only 14% of managers thought China would be the best performer, though 24% pegged it to be tops in the intermediate term (three to five years).

“A lot of the emerging markets story has been about India and China,” says Hallett. “But China has been on a bit of a hotter streak in the last few years, so maybe that caused the view to switch places.”

“This caught me by surprise,” admits Benincasa, who wasn’t sure why managers would consider India to be stronger than China in the short term. He points to the longer-term numbers to show that this one-year outlook might not be too significant. “India and china are most the likely areas to grow over the long term,” he says, “and that has been reflected in the survey.”

While managers might be uncertain about the markets, most (34%) agreed that inflationary pressures were the greatest risk to the global markets. A U.S. consumer slowdown came in second, with 25% of those surveyed choosing it as their leading concern, while the ongoing credit and liquidity issues worried 21% of managers surveyed.

As for the Canadian dollar, another hot topic these days, most people think the loonie will remain around par for the next 12 months, but will drop to between 85 cents and 95 cents in the next three to five years.

Benincasa wasn’t surprised by that statistic, considering the number of managers who thought oil would drop over the intermediate term. “The Canadian dollar is inherently tied to commodity prices, and people believe oil prices will fall,” he says. “You see that reflected in the Canadian dollar versus the U.S. dollar and you can make ties from this to the outlook on oil.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(06/13/08)

Originally published on Advisor.ca