Canadian dollar finds favour with managers: report

By Bryan Borzykowski | June 28, 2007 | Last updated on June 28, 2007
3 min read

More and more investment managers are jumping on the Canadian dollar bandwagon. According to the Russell Investment Manager Outlook, a quarterly poll of Canadian investment managers, more than 50% of investment managers are bullish on the dollar compared to 25% last quarter.

“The majority of Canadian investment managers surveyed have high expectations for the Canadian dollar, believe the Canadian equity market is fairly valued and are generally bullish on equities,” says Tim Hicks, chief investment officer at Russell Investments.

The survey also found that 68% of managers believe the Canadian equity market is fairly valued — that’s 19% higher than last year at this time.

“The survey mirrors the move in the markets. The Canadian dollar gained about 4% since end of first quarter,” says Derek Burleton, a senior economist at TD Bank Financial. “That shows that advisors are tracking the actual moves on the Canadian dollar.”

Burleton doesn’t think these results are just a blip, but he’s not as bullish on the dollar as some others might be. “We still see further upside,” he says, “but probably only to the 96 cent mark.”

One way the dollar might push itself on par or past the American greenback is if the U.S. dollar comes under “significant” selling pressure, says Burleton.

Energy could also have an effect on the dollar. “Oil prices are always a wild card,” he says. “We’re moving through peak driving season and there are concerns of gas supply and hurricanes.”

While investment managers might favour the dollar, they’re shying away from the bond market, the Russell survey found. “Sentiment for the bond market turned sharply negative in the third quarter,” says Hicks. Only 6% of managers were bullish on bonds, compared to 24% last quarter. “With yields rising on government issued bonds, high-yield bonds may continue to struggle.”

Burleton chalks the bond troubles up to global concerns. He says many central banks have raised interest rates — some of which surprised the economist — and as a result global bond yields have climbed. “It’s not just a Canadian and U.S. phenomenon,” he says. “That’s what’s going on globally and advisor sentiment is in keeping with the market.”

Unlike the dollar, which will continue to strengthen, Burleton doesn’t think bonds improve any time soon. He expects yields to keep moving upwards. “On a trend basis we see bond yields rising,” he says. “We saw the yield drive 0.5% and given new low levels this decade, that’s a significant increase.”

Russell Investments also reported other key findings related to private equity and real estate. With private equity, investment managers are worried about extreme valuations, excessive leverage and a lack of appealing trade opportunities.

In a recent presentation to the Economic Club of Toronto, Howard E. Johnson, president, Veracap Corporate Finance Ltd. pointed out that private equity buyers were, on average, paying 8.9 times earnings for their targets, up from 3.4 times earning in 2001.

The Russell report says that half of the managers surveyed thought private equity deals were having a negative effect on corporate restructurings.

The real estate market failed to generate a lot of enthusiasm among two-thirds of investment managers, likely as a result of the “glut and supply and high-risk mortgage lending problems in the U.S.,” says Hicks.

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Bryan Borzykowski