Money managers bullish about 2012

The non-stop rollercoaster ride of 2011 has done little to erode the undying optimism of Canadian money managers who are betting on 2012 being a good year for investment returns.

The sentiment towards Canadian and international equity markets, the most-favoured asset class, improved in the fourth quarter, with emerging markets leading the way, according to the latest Russell Investment Manager Outlook.

The study revealed that nearly eight-in-10 investment managers are expecting positive returns for the S&P/TSX in 2012, one-third of them expect a gain of 10% or more

Emerging markets to lead the charge The survey found that equity market sentiment for emerging markets saw the greatest change, with bulls rising from 50% to 69% of managers, and bears falling by half to just 13% of managers. “This positive sentiment may be influenced by several factors, including the fact that emerging markets’ valuations have fallen to more attractive levels in recent months,” says Greg Nott, chief investment officer, Russell Investment Canada Limited. “As well, there is an expectation that emerging markets will outperform the developed world, in light of the continued turmoil in Europe, and the struggling EAFE region.”

This positive emerging markets sentiment, he said, has encouraging implications for the Canadian market. “If emerging economies do well, it tends to create demand for oil and base metals, which provides support for the Canadian equities market.”

Canada viewed as an attractive market As a result of the strong rebound in energy and materials, most managers view Canada as an attractive market, with bulls standing at 63% and bears at 25%. Fifty-five per cent of respondents said Canadian equities are currently undervalued while 45% said the market is fairly valued. “It is indeed a rare occurrence to see not a single manager express the opinion that Canadian equities are overvalued,” says Nott.

The U.S., Europe and Far East The outlook for US equities improved slightly owing to improving economic data from the U.S. “It is also worth noting that the US equity performance beat virtually every other world market in October and November in Canadian dollar terms,” says Nott.

On the fixed income side, however, the outlook is clearly not positive, as Canadian bond bears declined from 67% of managers to 44%. With bulls sitting at 19%, the outlook is closer to neutral than it was a year ago when more robust economic growth expectations had most investors bracing for rate increases.

The outlook for EAFE markets (Europe, Australasia, and the Far East) remains bleak, with just 38% of managers bullish and 44% bearish. The continued uncertainty in Europe has lead to a consensus that the continent is entering a mild recession, with some analysts of the view that there could be further damage to the banking sector and a break-up of the Eurozone.

“Europe’s troubles will continue to cause volatility in the asset markets, the Eurozone will remain intact and the odds of a recession in the region reaching North American shores is low,” says Nott.

In another study, TD Waterhouse’s 2012 Investment Outlook predicted a bight year ahead for equities. Macroeconomic headwind notwithstanding, stocks will manage to climb the wall of worry and continue to outperform bonds in 2012, it said.

“Despite a year of economic difficulties in Europe, I’m confident the stock markets will advance in 2012,” says Bob Gorman, chief portfolio strategist, TD Waterhouse. “We will likely be in a relatively low growth, low inflation environment that should favour large cap stocks, which generate a good part of total return from substantial, rising dividends.”

Vincent Delisle, chief strategist for Scotia Capital, predicts a rise of about 15% in the S&P/TSX index. He says equities should rebound in the second half of the year as China recovers.