Canadian Treasurer

December 20, 2011

Latest Russell Investment Manager Outlook: 80 per cent of Canadian investment managers forecast positive returns in 2012

TORONTO-- Investment manager sentiment towards Canadian and international equity markets improved in the fourth quarter, with emerging markets leading the way, according to the latest Russell  Investment Manager Outlook, which was conducted between November 15 and 25, 2011.

Overall, equities remain by far the most-favoured asset class, with nearly eight-in-10 investment managers expecting positive returns for the S&P/TSX in 2012. In fact, the survey found that one-third of managers surveyed expect a gain of 10 per cent or more, and 77 percent expect a positive rate of return. Only six per cent of managers expect a decline of up to 10 per cent, and the same number expect  a decline of 10 per cent or more.

Emerging markets now most favoured equity market

While the survey found that equity market sentiment was up across the board, emerging markets saw the greatest change, with bulls rising from 50 per cent to 69 per cent of managers, and bears falling by half to just 13 per cent of managers.

"This positive sentiment may be influenced by several factors, including the fact that emerging markets' valuations have fallen to more attractive levels in recent months," said   Greg Nott, Chief Investment Officer of Russell Investment Canada  Limited. "As well, there is an expectation that emerging markets will outperform the developed world, in light of the continued turmoil in   Europe, and the struggling EAFE region."

Nott added that this positive emerging markets sentiment has encouraging implications for the Canadian market. "If emerging economies do well, it tends to create demand for oil and base metals, which provides support for the Canadian equities market."

Bullish sentiment up sharply for energy and materials sectors 

In fact, the survey found that sentiment towards the Canadian energy sector leapt from 61 per cent bullish to 80 per cent this quarter. "Energy has had a bit of a rough ride this year, but has found firmer footing of late, as oil has rebounded to near the $100 per barrel level," added Nott.

The materials sector also showed a large positive change in sentiment, with the number of bullish managers rising from 43 to 60 per cent. According to Nott, "While improved base metals prices may be part of the story, investors remain enamored with gold, as it is viewed by many as a safe haven asset, particularly with the current uncertainty around the European debt situation."

Canada   viewed as an attractive market

As a result of the strong rebound in energy and materials, most managers view Canada as an attractive market, with bulls standing at 63 per cent and bears at 25 per cent. When asked their views on the current valuation of Canadian equities, 55 per cent of managers responded that the market is undervalued and 45 per cent indicated that it is fairly valued. "It is indeed a rare occurrence to see not a single manager express the opinion that Canadian equities are overvalued," said Nott.

Outlook for U.S. Equities and Canadian bonds improves slightly, while EAFE markets remain bleak

The outlook for US equities improved slightly, with bulls up a few points to 50 per cent and bears down a few points to 25 per cent. "We continue to see improving economic data from the US, which is coming off an earnings season that delivered more positive surprises than negative ones," said Nott. "At the same time it is also worth noting that the US equity performance beat virtually every other world market in October and November in Canadian dollar terms."

On the fixed income side, the survey found that the outlook for Canadian bonds is clearly not positive, as Canadian bond bears declined from 67 per cent of managers to 44 per cent. With bulls sitting at 19 per cent, the outlook is closer to neutral than it was a year ago when more robust economic growth expectations had most investors bracing for rate increases.

The outlook for EAFE markets remains bleak, with just 38 per cent of managers bullish and 44 per cent bearish. The continued uncertainty in   Europe  has lead to a consensus that the continent is entering a mild recession, with some analysts of the view that we will see further damage to the banking sector and a break-up of the Eurozone. "At Russell, while we believe that Europe's troubles will continue to cause volatility in the asset markets, the Eurozone will remain intact and the odds of a recession in the region reaching North American shores is low," said Nott.

Managers shifting from defensive sectors to cyclical areas

Looking at individual sectors of the Canadian equity market, managers' increasing optimism may be seen in a general shift in sentiment away from defensive sectors and towards more cyclical areas of the market. For example, the number of bears increased sharply towards the slow-but-steady telecom and utility sectors (67 and 53 per cent bearish respectively), while bullishness rose significantly for cyclical sectors including energy, materials and consumer discretionary (at 80, 60 and 40 per cent bullish respectively).

Financial services continues to deteriorate

Long the darling of investment managers, sentiment towards financial services continued to deteriorate likely weighed down by the increasing risk profile of the global banking sector and a struggling insurance sector that has been under pressure from lower interest rates and higher regulatory hurdles. Bulls have fallen 18 per cent to just 29 per cent of managers, and bears have climbed from 36 to 43 per cent.





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