Bulls and Bears in Market Outlook

Conducted in February and March of 2008, the poll also found that 43% of managers surveyed were bearish on the outlook for Canadian equities, showing remarkable polarity among investment managers.

“The even number of bulls and bears on Canadian equities may reflect a general disparity of opinions. Is the worst of the sub-prime crisis over? Is recession coming to Canada? How will central banks balance demands for more stimulus while containing inflation? These are the questions currently dividing market watchers,” says Timothy Hicks, Russell Investments Canada’s chief investment officer.

“The split decision could also mean that more managers are willing to get off the fence with their opinions in regards to where this market is headed.”

Investment managers displayed a greater consensus towards a number of specific asset classes and sectors within the Canadian market, as bullishness towards small cap stocks increased slightly to 24% from 19%, while bearishness remained dominant at 56% of survey respondents.

According to Russell, previous surveys have indicated that small cap pessimism may be increasing because many smaller Canadian companies are in the currency-sensitive manufacturing sector. Thirty-five percent of investment managers are now bullish towards the Canadian dollar compared to 23% in the previous quarter.

Bullishness towards the gold-heavy materials sector soared to 62% from 38%, and bears dropped to 33% from 45%. Factors driving this optimism include rising gold prices, continuing deterioration of the U.S. dollar, and a long-held belief that gold is a hedge against inflation, despite the fact that gold has not actually kept pace with inflation over the past few decades.

Attitudes toward the financial sector generally echoed current market conditions, with bulls rising to 42% from 30% and bears rising to 40% from 35%. This illustrates how opinion is mounting on both sides of the debate over whether Canadian bank stocks have finally reached bottom, or whether there might be further downside risk around the corner.

The information technology sector saw bullishness fall to 40% from 50% while bearishness climbed to 39% from 23%. Factors may include doubts about Research In Motion’s ability to maintain its rapid growth rate, as well as a general cooling of sentiment towards the technology sector, as demonstrated by the recent steep declines among big names like Apple and Google.

Confidence in Canadian bonds declined this quarter, with 50% of managers now expressing negative sentiment and only 21% saying they’re bullish.

“This suggests that managers are expecting interest rates to stop falling or perhaps rise,” explains Hicks. “However, this change in sentiment may also be a response to worries that aggressive U.S. rate cuts could lead to inflation or even stagflation south of the border, with subsequent spillover into the Canada.”

The U.S. market continues to struggle, as bullishness declined to 33% from 42% while bearishness rose slightly to 44%. Canadian investment managers are now less bullish on U.S. equities than on any other equity asset class, despite aggressive action by the U.S. Federal Reserve.

Overseas stocks are also failing to induce confidence among managers, as Europe, Australasia and Far East (EAFE) equities have not yet regained their shine. Once the most highly-favoured equity sector among Canadian investment managers, bullishness has slipped to 34% from 37%, and bearishness has climbed to 41% from 23%. Bullishness towards emerging market equities is also down, falling to 36% from 43%, with bears growing in number to 51% from 43%.

To comment on this story, email jody.white@rci.rogers.com.