After a relatively flat quarter, Canadian investment advisors have turned quite bullish on Canadian equities, energy and a number of other industry benchmarks, finds the Q4 2017 Advisor Sentiment Survey conducted by Horizons ETFs Management (Canada) Inc.
Further, respondents have turned positive on equity indices after extremely high levels of bearish sentiment in the Q3 survey. On the S&P/TSX 60 Index, 62% of advisors in the Q4 survey stated they are bullish on the Canadian blue-chip equity index, compared to 42% last quarter.
Similarly, bullish sentiment on Canadian financials and energy has also picked up since last quarter, rising to 62% from 54% on financials, and 53% versus 40% on energy equities.
“Advisors have watched oil recover from its 2016 lows and believe that the valuations of Canadian blue chips are at compelling levels,” says Steve Hawkins, president and co-CEO of Horizons ETFs, in a release. “We will likely see ETF asset flows follow this sentiment heading into Q4.”
The number of advisors optimistic on crude oil increased significantly in the survey: 53% are bullish on the commodity, versus 41% that were bullish last quarter. The increase in sentiment reflects the commodity’s performance, where crude oil prices rose 12.33% last quarter to US$52.95 (as at September 30, 2017). Sentiment toward natural gas also picked up: 47% were bullish, compared to only 21% last quarter. Performance of natural gas has yet to catch up to sentiment, where prices actually remained flat in Q3, dipping 0.92%.
“Oil supply and demand has come more into balance over the last quarter, and we see that reflected in the advisors’ growing bullishness for the asset class,” says Hawkins. “Oil hovering around the $50 mark is no longer just a spike, but a new longer-term reality.”
Sentiment in U.S. equity benchmarks remained quite flat, despite positive performance over the quarter.
The S&P 500 Index saw bullish sentiment stay level at 53%, despite the fact the S&P 500 Index delivered a 3.96% return in Q3 and is up 14.04% year-to-date. Similarly, 51% of advisors were bullish on the NASDAQ-100 Index, only slightly up from 50% last quarter. The NASDAQ-100 Index continues to top record highs after delivering a 22.94% return year-to-date.
“Advisors continue to hold their breath when it comes to U.S. equities and appear to be waiting for a correction,” says Hawkins. “Despite the strong performance equities have shown, sentiment reflects the hesitancy or flat nature we see in flows for this asset class.”
On U.S. bonds, only 15% of advisors were bullish on the S&P U.S. Treasury Bond 7-10 Year Index (total return), while 50% were bearish. Despite fears about rising interest rates, this asset class is up about 0.45% over the last quarter.
“There is still a lot of concern over rising interest rates and uncertainty regarding the U.S. Federal Reserve’s plans,” adds Hawkins. “Advisors are waiting to see who the next Fed chair will be before they make any drastic moves.”
Canadian advisors continue to be outright bearish on the direction of the Canadian dollar, with 55% of advisors believing the loonie will decline in value (relative to the U.S. dollar) over the next quarter. That’s in line with the 53% of advisors who were bearish last quarter. The CAD versus USD had a positive return last quarter of 3.96% due to rising interest rates and recovering commodity prices.
“Given the recovery of oil and the rise of Canadian interest rates, an overly bearish sentiment can at first seem surprising,” says Hawkins. “However, when you consider the uncertainty regarding U.S. interest rates and Canada’s mortgage balances, if a U.S. rate were to happen, the Bank of Canada likely can’t follow suit – this is the crux of what advisors are worried about.”
The majority of advisors were bullish on emerging market equities, as represented by the MSCI Emerging Markets Index — 63% were bullish heading into Q4. The MSCI Emerging Markets Index was up 7.02% last quarter.
“We will see interest in emerging markets continue to grow, especially as these equities are relatively cheap compared to those in North America,” says Hawkins. “As oil recovers worldwide, sentiment will continue to stay bullish, as commodities fuel global growth.”
Advisors were bullish on seven of 14 industry benchmarks, which was a dramatic increase in bullish sentiment compared to last quarter, where advisors were only bullish on four industry benchmarks.
About the survey: The survey asked Canadian investment advisors for their expectations of returns – bullish, bearish or neutral – on 14 distinct asset classes for the upcoming quarter, which ends December 31, 2017.