Russell Investment Manager Outlook Highlights

- 73% of managers bullish on industrials
- 63% of managers bearish on bonds
- 66% of managers bullish on Emerging Markets

TORONTO, Sept. 30 /CNW/ - It looks as if more bearish managers are hibernating, even as the Canadian equity market continues to forge ahead in the third quarter of 2009 - according to the latest quarterly Russell Investment Manager Outlook poll (conducted by Russell in late August and early September of 2009).

"Investment managers appear to be willing to take on more risk these days with the bullish outlook for equities strong, bears decreasing in number, and sentiment towards bonds dwindling," says Sadiq S. Adatia, Chief Investment Officer of Russell Investments Canada Limited.

"Even if there's some disagreement as to how far and how fast markets can keep climbing, relatively few managers appear worried about further downside potential."

Only 18% of investment managers bearish towards Canadian equities

The Canadian market has risen fastest among the world's developed economies this year, but that hasn't dimmed the optimism of most investment managers. A solid 65 percent remain bullish towards broad market Canadian equities, and bears have dropped from 26 percent in the second quarter to just 18 percent in the third quarter of 2009.

To be fair, nearly a quarter of investment managers say the Canadian market is now overvalued, which is a slight increase from last quarter, and only 12 percent says it is undervalued, which is a significant drop from 45 percent three months ago. Nonetheless, 65 percent rate the market as fairly valued.

Industrials, energy, financials among most bullish sectors

Reviewing domestic market sectors, industrials (which includes railroads, airlines, and infrastructure stocks), now lead in bullish sentiment with 73 percent of managers expressing a positive outlook. Industrials are seen by some as a conservative choice in the early stages of economic recovery.

The energy and financial sectors are still favourites, garnering bullish sentiment from 67 and 64 percent of managers respectively. Financial services bears have dropped 27 percent to 18 percent as Canada's financial institutions have remained solid throughout the financial crisis and even posted strong earnings.

Consumer discretionary stocks saw a large increase in bulls from 47 to 66 percent of managers.

"With unemployment slowing down, the auto sector picking up, and aggressive sales promotions keeping retail revenue afloat (albeit with thin margins), the change in sentiment is a strong vote of confidence for the Canadian economy," says Adatia.

The information technology sector, which is largely a proxy for Research in Motion (RIM), remains positive with 63 percent of managers bullish and 23 percent bearish. These sentiments were expressed before RIM reported a weaker-than-expected sales outlook, alongside a slight dip in fiscal second-quarter earnings.

A solid 48 percent of managers are now bullish towards telecom shares, a sector with strong earnings and dividends, if somewhat unspectacular growth prospects.

Bullish sentiment towards materials slipped from 64 percent to 57 percent, as gold stocks have generally lagged the market, despite gold prices being near $1000 US/oz. Consumer staples and utilities both saw bullishness increase, perhaps as cautiously optimistic managers move into relatively defensive equities positions.

63% of managers bearish on bonds

Meanwhile, Canadian bonds are finding very few takers as 63 percent of managers are bearish on fixed income.

"There appears to be a chasm between managers who believe economic recovery is underway, and therefore favour equities (or even real estate), and those who think the market may be ahead of itself, and therefore favour cash. That leaves bonds in no man's land, with only six percent of managers describing themselves as bullish, and almost two-thirds as bearish," says Adatia.

High yield bonds, with their higher risk/return profile, fared better, with 38 percent still bullish, down from 54 percent last quarter.

Managers anticipate foreign opportunities, particularly Emerging Markets

In the US, bulls are up a few points from last quarter to 49 percent, and bears are down several points to 21 percent.

Looking abroad, EAFE equities have lagged Canadian this year, and investment managers seem to be expecting some catch-up: Bullishness jumped from 43 percent last quarter to 56 percent in the third quarter, and bearishness dropped from 35 percent to 15 percent.

"The US economy is clearly not back to a "normal" state, but we expect to see sentiment continue to improve by a few points each quarter as signs of recovery mount in a slow but- steady fashion," says Adatia.

"Meanwhile, European markets have largely failed to produce the 'green shoots' that have bolstered expectations in North America, but with stocks already down so far, managers may believe the situation can only improve."

Emerging markets lead the way as 66 percent of managers were bullish and only 28 percent bearish.

"This optimism reflects the belief that emerging markets will be key drivers of global growth, as well as managers' recent willingness to increase their risk exposure in pursuit of that growth," says Adatia.

Looking Ahead

More than two-thirds of investment managers expect inflation in Canada to remain below two percent by the end of 2010. That means one third do expect inflation to rise, and in the longer-term, higher inflation seems to be a likely risk.

"At Russell, we believe this underlines the need for retirees - and those approaching retirement - to maintain adequate equity exposure in their portfolios to provide a hedge against inflation and offset the rising cost of living," says Adatia.

"We strongly believe in the market's long-term prospects, and continue to suggest full participation in the markets. However, it's quite possible that the heady gains of recent months will slow down - or even temporarily reverse - over the next quarter. We recommend a thoughtful approach to diversification in order to mitigate this risk without foregoing significant opportunities."