While consumer confidence may be in the doldrums, the majority of investment managers remain bullish on Canadian stocks, according to the latest Russell Investment Manager Outlook survey.
The poll found 56% of managers were optimistic about equities, with half of managers saying the market was undervalued. Just over one third (36%) said the market was fairly valued.
Less than 7% were bullish toward bonds and cash holdings, while 38% expect to see interest rates rise by 50 basis points over the coming year.
“With bond yields hovering near record lows and rates only heading higher, we’ve seen more investors turn to dividend investments, which currently offer more attractive yields and greater long term return potential,” says Sadiq S. Adatia, chief investment officer of Russell Investments Canada Limited. “The Russell Canadian Dividend Pool, for example, has returned close to 9% so far this quarter. However, fixed income remains an important part of a diversified portfolio.”
While the majority may be keen on stocks, there has been some erosion in confidence, as 63% were bullish in the second quarter survey release. But not all segments of the Canadian equity space were in decline; bullish sentiment toward small-cap stocks rose nine points to 50%.
“Many of the companies in this group have strong balance sheets and high yields,” says Adatia. “There are a number of potential merger and acquisition targets in the small cap space, and we believe many of these firms could strongly outperform their large cap peers once a more normal risk appetite returns to the market.”
On a sectoral basis, the outlook on financial services has declined, with only 46% saying they were bullish, down from 63% in the previous quarter.
“Manulife’s poor earnings report plus its earlier dividend cut continues to weigh on the sector,” said Adatia. “Meanwhile, banks have not increased dividends or generated much in the way of capital gains till the end of August. The recent Basel report may give some positive momentum to the sector going forward.”
Energy, however, is still viewed favourably by 54% of managers.
Looking abroad, bullish sentiment rose from 33% in the last quarter, to 44% of managers in the latest survey. Emerging markets were the object of desire for 47% of managers, down from 58% last quarter, while bullishness on U.S. stocks fell from 61% to 50%.
“In our view, European markets are likely to remain muted in the near-term with investment inflows slowing to a trickle. We believe these markets need a positive economic surprise to re-ignite,” says Adatia. “As for emerging markets, the growth numbers are still very respectable — they’re just not as high as some investment managers had hoped. Emerging markets remain, in our view, the growth engine of global markets.”
(09/29/10)