Canadian investment advisors expect Canadian and U.S. equities to continue to deliver positive returns for the fourth quarter (Q4) of 2016, according to Toronto-based Horizons ETFs Management (Canada) Inc.’s Q4 2016 Advisor Sentiment Survey.
The survey asked advisors for their expectations of returns — bullish, bearish or neutral — on 14 distinct asset classes for Q4 2016; advisors were bullish on eight of 14 asset classes, overall, including favourable bullish sentiment on six of the seven equity indices that the survey tracks.
The highest bullish sentiment among advisors was for the S&P/TSX 60 index as 63% of advisors were bullish on broad Canadian equities going into Q4.
Canada has been one of the world’s best-performing domestic equities markets in 2016 and the S&P/TSX 60 index was up by more than 5% in the third quarter (Q3) and by more than 14% year-to-date.
“Canada has been a great equity market to be invested in during 2016,” says Steven Hawkins, president and co-CEO at Horizons ETFs, in a statement. “The equal-weighted version of the S&P/TSX 60 — the S&P/TSX 60 equal weight index — is up by almost 20% due to its higher weighting in two of the top-performing sub-sectors: commodities and energy. Much of the performance in Canadian stocks has been on the heels of a strong performance in gold stocks and energy stocks.”
Almost six in 10 advisors (59%) were bullish on the S&P/TSX capped energy index whereas bullish sentiment on gold stocks decreased to 48% for Q4 from 52% in Q3 as the energy stock index gained 5.5% last quarter, while the gold index declined by 6.1%. Sentiment on the underlying commodities was also similar, with 60% of advisors bullish on crude oil while 49% were bullish on gold bullion.
“The sentiment on these two indices is really not all that surprising,” Hawkins says. “OPEC’s decision in late September to cut oil output was a big shot in the arm to oil prices. On the flip side, we’ve seen gold prices declining dramatically after an unprecedented rally in 2016. Even with the most recent pullback, gold stocks are still up by more than 60% year-to-date.”
Canadian financial stocks, represented by the S&P/TSX capped financials index, also saw a decent turnaround in sentiment as 52% of advisors were bullish on this index for Q4 vs only 44% in Q3.
Advisors were also bullish on U.S. equities, with 61% of advisors bullish on the prospects for the S&P 500 composite index and 63% bullish on the tech-heavy Nasdaq 100 index.
“U.S. stocks are trading at very high valuations — essentially the highest since the tech bubble of the early 2000s,” Hawkins notes. “This really hasn’t slowed down advisor bullishness for U.S. equities, which has remained high all year.”
Despite the strong inflows into Canadian-hedged U.S. equity ETFs, sentiment on the Canadian dollar (C$) was very mixed, with about 40% of advisors bearish on the direction of the loonie, 33% bullish and another 27% neutral, as the C$ lost about 1.6% in Q3.
“The strength of the loonie is really dependent on the strength of energy prices,” Hawkins says. “Although the loonie rallied by approximately 6% last quarter, it’s not surprising to see reserved sentiment here since there are a lot of unknowns in terms of energy prices and the direction of interest rates in the U.S., which are probably the two biggest factors in pricing for the loonie.”
There was a strong upswing in advisors’ sentiment on emerging markets as 52% of advisors are bullish on emerging markets heading into Q4, as represented by the MSCI emerging markets index.
“There are two big stories with emerging markets: resurgent energy prices and the likely formation of a bottom on China’s equity market, and many observers think the risk is largely priced-in on those equity prices,” Hawkins says. “Given the relatively low valuations of emerging-market vs developed markets equities, more advisors may be more comfortable in investing in these stocks as potential risks subside.”
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