Canadian investment manager sentiment toward equities improved this quarter, led by U.S. and Canadian small cap equities, according to the latest quarterly Russell Investment Manager Outlook.
According to the Outlook, 72% of managers were bullish on U.S. equities in the most recent quarter, up from 50% at the end of the previous quarter; just 17% expressed bearish sentiment. “There is a growing consensus that the U.S. economy is building momentum and will not be dragged down by issues elsewhere in the global economy,” said Greg Nott, chief investment officer with Russell Investments Canada.
Investment managers remain positive about Canadian equities, despite the fact that returns lagged behind those of U.S. equities in Q1. Results from the Outlook indicate that 56% of managers are bullish toward Canadian equities, down from 63% in the previous quarter. Seventy-five percent of managers indicated they believe the market for Canadian equities is fairly valued, 17% of managers feel that the market is undervalued, and only 8% feel it is overvalued. Canadian small cap equities sentiment is much more positive, where bullish sentiment has doubled over the last quarter to 65%. “Strong returns over the last quarter suggest some investors may be piling into a sector that performed poorly in 2011 but may offer opportunities today,” explained Nott.
Looking at individual sectors of the Canadian equity market, investment managers continue to see the best value in cyclical stocks rather than defensive stocks, suggesting that they believe the economy is poised for growth. Bearish sentiment, however, remained high in utilities (67%) and consumer staples (43%). Bullishness rose significantly in IT (73%) and remained strong in materials (53%).
On the fixed income side, 71% of managers are bearish toward Canadian bonds, up from 44%; just 12% remain bullish. The sentiment in the high yield space is much more evenly split, with bears only slightly outnumbering those in the bullish and neutral camps.
“While bond yields may move higher, as investors move away from the “flight to safety,” we do not expect a bear market in bonds to develop, as headwinds to stronger economic growth remain significant and should keep bond yields relatively constrained,” commented Nott.
Visit Russell Investments for the full Investment Manager Outlook.