Optimism abounds heading into 2009 as Canadian investment managers are bullish towards virtually all equity sectors, according to a survey released Monday by Russell Investments Canada Ltd.

Following the historic market volatility of October, only about one in four investment managers remain bearish towards Canadian, U.S., and international equities.

“At the end of 2007, with the loonie above par and equities setting all-time highs on the back of record commodity prices, only 28% of investment managers were bullish towards Canadian equities. After all, how much higher could they go?” says Sadiq Adatia, chief investment officer of Russell Investments Canada.

“Fast forward to the closing months of 2008, and the pendulum has swung the other way. Oil is below US$50, gold is dramatically lower, the loonie is struggling, and the TSX has hit bottom. Today, many managers seem to feel there’s no way left to go but up.”

When asked to predict broad Canadian equity market performance for 2009, 32% of managers surveyed said they expect gains of up to 10%, and 40% predicted returns of 10% or more. Meanwhile, only 13% of managers said they expect negative returns, and 16% predicted flat markets.

Only 11% of managers currently rate Canadian equities as overvalued, 23.7% believe Canadian equities are fairly valued, and 65.8% believe Canadian equities are undervalued.

Bullishness towards the financial services sector in Canada is down but still relatively high at 55%.

“Canada has the world’s most sound banking system according to the World Economic Forum, and our banks’ record of slow-but-steady growth and extremely reliable dividends is clearly attractive in the current environment,” says Adaita.

“Bullishness towards utilities is up sharply from 23% to 47%, likely for a similar reason: utilities offer steady dividend yield, which provides current cash flow and downside protection in unpredictable markets.”

The outlook for the materials sector is solid with bullishness nearly doubling from 23% to 44%.

“There is a serious valuation problem in this sector, with some gold mining shares now trading below book value. Clearly, investment managers see opportunity in this situation,” says Adatia.

Bullishness towards telecom and consumer staples companies remained relatively high at 52% and 46% respectively.

“In a potentially recessionary environment, these consumer must-have goods provide defensive investments. It will be interesting to see how developments with the BCE privatization deal impact telecom sector sentiment next quarter,” says Adatia.

In the U.S., which saw some of the worst of the credit crises, the number of bullish managers climbed from 48% to a remarkable 60%. Adatia believes this is quite likely a sign that the aggressive actions of the U.S. government and U.S. Federal Reserve in recent months have succeeded in giving the market confidence.

Bullish sentiment was down drastically in the first three quarters of 2008 for overseas stocks, but optimism skyrocketed in the last quarter from 28% of managers to a solid 50%.

“It seems possible that, following the acute economic trouble striking the U.S., markets were braced for a more severe impact in Europe and Asia. With the U.S. now showing signs of stability, sentiment towards EAFE equities has been able to bounce back,” says Adatia.

In emerging markets, 39% of managers say they are bullish, but a considerable 36% are still bearish.

“We see a couple of factors at play. First, even with China expecting growth of 7-8% going forward, there is still higher risk due to weaker regulation and less transparency. Second, in a global slowdown, investors may need to see signs of a sustained recovery in the west before they are willing to place a bigger bet on developing regions,” explains Adatia.

The investment managers expressed these views in the latest quarterly Russell Investment Manager Outlook poll conducted from Nov. 13 to 28.

IE