Canadian equities are losing their lustre while investment managers are growing bullish towards the United States, according to a report.
In the latest Investment Manager Outlook report, Russell Investments says more than 95% of investment managers think the Canadian market is fairly valued or overvalued. Bullishness towards Canadian equities has dropped to 33% from 43%, and bullishness towards the materials sector—dominated by gold stocks—has plunged to 32% from 62%.
Despite the recent difficulties experienced by the U.S. market, bullishness towards U.S. equities climbed to 45% from 33%, and bearishness dropped 13 percentage points to 31%.
“Looking at the big picture, it’s likely that investment managers are simply finding better relative values in the weaker U.S. market than elsewhere in the world, and may be looking to shift profits from Canada and other markets back into American stocks,” says Sadiq S. Adatia, chief investment officer of Russell Investments Canada.
He explains that investors have been buying Canadian equities for a long time, and with the current sentiment about market value it may be time to pull out and invest elsewhere. “So where do we go that has the minimum in terms of downside? They’re looking at the U.S. in that regard.”
However, certain sectors of Canada’s economy remain attractive to investment managers, according to the report. Bullishness towards industrials—such as airlines and railways—climbed significantly to 42% from 22%, and bullishness towards the consumer discretionary sector rose to 32% from 19%. Information technology also saw bullishness rise to 69% from 40%.
The financial services sector is split evenly, with 43% of investment managers who are bullish and expect a rebound within a reasonable timeframe, and 43% who are bearish and see the subprime debt issue as a serious, long-term problem.
Regarding the specific factors negatively affecting equity performance, 65% of investment managers cited a slowing economy, while credit markets, low corporate earnings, inflation and energy costs were also cited at a lesser extent. Investment managers continue to strongly favour equities over bonds, and with no rate cuts on the horizon, bullishness towards Canadians bonds sits at only 18%, with 61% of investment managers polled saying they are now bearish.
“In summary, market sentiment deteriorated somewhat in the second quarter of 2008,” says Adatia. “A broad-based economic slowdown is the consensus view, and investment managers are optimistic about only a handful of asset classes—most notably, U.S. equities.”
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