Managers bullish on U.S. equities, bearish on bonds

Canadian investment manager sentiment towards equities improved this quarter, with U.S. equities and Canadian small caps leading the charge, and EAFE edging up slightly, according to the latest Russell Investment Manager Outlook.

Almost 90% percent of investment managers surveyed said macro-economic themes, which have had strong pull on the market, will continue to influence their investment decisions.

“Although most managers do consider macro-economic themes as part of their process, we suspect most feel they add more value by focusing on bottom up research and company fundamentals,” said Greg Nott, chief investment officer, Russell Investments Canada Limited.

While equity market sentiment was up in general, it was U.S. equities that saw the greatest change, with bulls rising from 50% to 72% of managers, and bears falling to just 17% as improved US economic data continued to emerge.

“There is a growing consensus that the US economy is building momentum and will not be dragged down by issues elsewhere in the global economy,” added Nott.

Despite lagging U.S. equity returns in the first quarter, investment managers remain positive about Canadian equities, with 56% of managers bullish, though that’s down from 63%. When looking at Canadian equities, most managers feel that while they may not be a bargain, fundamentals and valuations are still reasonable. Seventy five percent of managers see the market as fairly valued, 17% of managers feel that the market is undervalued, and only 8% feel it is overvalued.

The view on Canadian equities is much more positive in the small-cap sector, where bullish sentiment has doubled over the last quarter to 65%.

“Strong returns over the last quarter suggest some investors may be piling into a sector that performed poorly in 2011 but may offer opportunities today,” said Nott.

The outlook for EAFE equities improved 6% to 44% of managers, and bears dropped dramatically from 44% to just 11%. In contrast, the outlook for emerging-markets equities declined, with bulls down 10 points to 59% and bears up several points to 18%.

Looking at individual sectors of the Canadian equity market, investment managers continue to see the best value in cyclical stocks rather than defensive stocks, suggesting they believe the economy is poised for growth. Interestingly, no investment manager is bullish on utilities, as the number of bears remained high in that sector (67%), followed by consumer staples (43%).

Bullishness rose significantly in information technology (73%) and remained strong in materials (53%).

On the fixed-income side, Canadian bond bears increased to 71% of managers from 44%, with only 12% of managers remaining bullish. The sentiment in the high yield space is much more evenly split with bears only slightly outnumbering those in the bullish and neutral camps.

“Government bond yields were expected to rise modestly in the first part of the year on better economic data from the US, and some improvements in the European debt crisis,” said Nott. “While bond yields may move higher, as investors move away from the flight to safety, we do not expect a bear market in bonds to develop, as headwinds to stronger economic growth remain significant and should keep bond yields relatively constrained.”