Canadian investment advisors have turned bearish on Canadian and U.S. equities after extremely bullish sentiment in the previous two quarters, reveals a Q2 2017 survey conducted by Horizons ETFs Management (Canada) Inc.

Read: Advisors bullish on equities: survey

The survey asked Canadian advisors for their expectations of returns — bullish, bearish or neutral — on 14 distinct asset classes for the upcoming quarter.

On the S&P/TSX 60, only 42% of advisors are bullish versus nearly 69% at the start of January.

Similarly, sentiment on the Canadian equity subsector of financials dropped to 37% from 56% (Q2 survey versus Q1 survey), as represented by the S&P/TSX Capped Financials. And sentiment on energy equities fell to 47% from 68%, as represented by the S&P/TSX Capped Energy.

The reversal is likely due to “high valuations and depressed crude oil prices,” says Steve Hawkins, president and co-CEO of Horizons ETFs, in a release.

Advisors were bullish on only one asset class: emerging markets equities, as represented by the MSCI Emerging Markets Index. Bullish sentiment on emerging markets increased to 53% from 43% last quarter. The MSCI Emerging Markets Index was up 11.47% last quarter.

The sentiment toward equities was also observed in U.S. benchmarks, many of which continue to break record highs.

The S&P 500 saw bullish sentiment drop to 47% from 65%, despite the index being up 6.07% year-to-date (in U.S. dollar terms). Similarly, only 48% of advisors were bullish on the NASDAQ-100, down from 62% last quarter. The NASDAQ-100 continues to top record highs after delivering a 12.09% return year-to-date.

Read: Insights into investing with U.S. equity ETFs

“Advisors naturally need to temper their return expectations when valuations are so high, which may explain the caution on U.S. stocks,” says Hawkins.

Only 44% of advisors were bullish on crude oil, down from 57% the previous quarter. And only a paltry 28% were bullish on natural gas. Crude oil prices declined nearly 5.81% last quarter, while natural gas declined 14.34%.

“For the Canadian equity market to have a chance of going higher, energy prices have to remain stable or continue to rise,” says Hawkins. “Both crude oil and natural gas appear very challenged to go any higher than the levels where they have been trading for most of the year.”

Bonds, Canadian dollar and emerging markets

On U.S. bonds, only 18% of advisors were bullish on the S&P U.S. Treasury Bond 7–10 Year (total return), while 46% were bearish. Despite fears about rising interest rates, this asset class is up about 1.07% over the last quarter.

“Most bond asset classes have actually generated a positive return as prices in fixed income securities probably declined a bit too much in anticipation of rate rises,” says Hawkins.

Canadian advisors were outright bearish on the direction of the Canadian dollar, with 53% of advisors believing it will decline in value (relative to the U.S. dollar) over the next quarter. The Canadian versus U.S. dollar actually had a modest positive return last quarter, but the combination of lower interest rates in Canada and low commodity prices are likely driving this high level of bearish sentiment.

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“In general, there is a large view that the world is undergoing a global cycle of reflation,” says Hawkins. “So investors are opting for lower-valuation equity markets that are currently experiencing strong economic bounce-backs.”

See the full survey results.

About the survey: Horizons ETFs conducts a quarterly sentiment survey of Canadian investment advisors. The survey quantitatively measures advisors’ quarterly outlooks as they relate to key benchmarks covering equities, bonds, currencies and commodities.