- Originally from our sister publication, Advisor.ca
The U.S. economy should sustain its recovery, despite the expiry of the Federal Reserve’s second round of quantitative easing, according to a survey of Canadian investment managers.
In fact, the latest Russell Canada Investment Manager Outlook found the American stock market is seen as holding the most promise. Sixty two percent of respondents were bullish on U.S. stocks, while only 12% expressed bearish sentiment.
The Fed’s controversial QE2 program came to an end on June 30, but 70% said this was no cause for alarm.
“We believe this development will provide a healthy opportunity for the U.S. economy to stand on its own, and we are confident that authorities will act quickly to provide additional support if it is indeed required, ” said Greg Nott, recently appointed chief investment officer of Russell Investment Canada Limited. “Growth remains the dominant theme, and we believe the US economy is continuing to move in the right direction.”
Investment managers are re-examining their Canadian equities, which have enjoyed a lengthy commodity-driven bull run. Only 43% expressed bullish sentiment, compared to 68% in the previously quarterly survey. Two in 10 expressed outright bearishness.
“This drop in sentiment is likely also due to a number of factors including the potential sell-off in commodities, a softer economy, stubbornly high unemployment, and the possibility of slower year-over-year GDP growth,” said Nott.
Some of the largest declines in sentiment were among the sectors that drove the Canadian market to its current level: energy industrials, information technology and financial services. The survey found 88% of managers believed current valuations were fair, suggesting there was little upside left.
Bullish sentiment toward energy fell from 84% to 65% of managers, while IT bullishness fell from 65% to 52%. Industrials, with a high exposure to energy costs, have seen bullish sentiment fall from 68% to 53%, while financials have been hit by lackluster earnings, falling from 55% bullish to 39%.
Not surprisingly, with the U.S. markets seen as darlings and Canadian stocks under review, the outlook on the loonie has taken a hit as well. Forty one percent of managers expressed bearish sentiment on the Canadian dollar versus its American cousin, up from 18% in the second quarter.
The outlook for emerging markets has remained stable, with 41% of managers bullish and 21% bearish. This lukewarm sentiment reflects concerns over rising inflation and tight monetary policy, according to Nott.
“Interestingly, international markets share a similar sentiment, albeit with an entirely different set of headwinds, including sovereign debt issues, inconclusive stress tests of the European banking system, and the lingering fear that new fiscal landmines may be exposed,” he said.