Canadian investment advisers expect Canadian and US equities to continue to break record highs in the first quarter of 2017, according to the Q1 2017 Adviser Sentiment Survey conducted by Horizons ETFs Management (Canada).
The survey asked Canadian investment advisers for their expectations of returns – bullish, bearish or neutral – on 14 distinct asset classes for the upcoming quarter (Q1 2017).
The highest bullish sentiment among advisers was for the S&P/TSX 60 Index. More than two-thirds (63 per cent) of Canadian advisers were bullish on broad Canadian equities going into the fourth quarter. Canada was one of the best-performing global equity markets in 2016, with the blue-chip S&P/TSX 60 Index generating more than a 21 per cent return (on a total return basis), and 5.6 per cent in the last quarter alone.
"Canadian investment advisers clearly expect Canadian equities to continue to climb to new highs," says Steven Hawkins, president and co-CEO at Horizons ETFs. "It's important to recognise that the broad Canadian benchmark is largely driven by our financials and energy sectors, both of which had strong rallies in the previous quarter."
On a sector basis, 56 per cent of Canadian advisers were bullish on the S&P/TSX Capped Financials Index which was up more than 11.5 per cent in Q4. Financials across North America have railed since Trump's election in anticipation of less regulation, rising interest rates and a generally positive outlook for consumer growth and spending.
The other key driver for Canadian equity prices has been a strong resurgence in energy prices. A strong majority of advisers (57 per cent) continue to be bullish on crude oil, and a further 68 per cent are bullish on Energy equity prices as represented by the S&P/TSX Capped Energy Index.
Bullish sentiment declined dramatically on natural gas prices, dropping to 48 per cent from 55 per cent last quarter, despite the fact that natural gas prices rose 28.1 per cent last quarter. Regardless, there is an ancillary benefit to energy equities from the rising crude and natural gas prices, which generated an 11.1 per cent return during the last quarter for S&P/TSX Capped Energy Index.
"For the Canadian equity market to have a chance of going higher, energy prices have to remain stable or continue to rise," says Hawkins. "The negative sentiment on natural gas could be a result of the dramatic rise in gas prices last quarter, so we would need the second half of winter to be much colder to drive those prices higher."
About two-thirds (65 per cent) of advisers were bullish on the prospects for the S&P 500 Index. The index continued to hit new highs last quarter after the US election. Bullish sentiment was also strong for the NASDAQ-100 Index, with 62 per cent of advisers bullish on this index. The NASDAQ-100 offered about a 2.6 per cent return (in CAD terms).
"The S&P 500 Index has a trailing P/E of more than 25, which is one of its highest valuation levels ever. Fundamentally, the US economy is on much better footing than most other developed nations, but the prospect of a pullback from lofty valuations and the potential cooling of the Trump rally loom large," says Hawkins. "Still, for Canadian ETF investors, the US market remains a key investment target, particularly for diversification reasons, since it offers exposure to sectors such as technology and healthcare, which have a much lower representation in Canada."
On US bonds, only 27 per cent were bullish on the US 7-10 Year Treasury Bond Index (48 per cent were bearish). This asset class lost 5.8 per cent (in CAD terms) last quarter, more than a year's worth of yield.
"On the flip side of bullish sentiment for equities, is generally negative sentiment on the direction of bonds – which have been negatively impacted by rising or the threat of rising interest rates," says Hawkins. "More than half of inflows in the ETF industry last year had been to bonds. In December, we saw that trend slow down but flows into fixed income ETFs were still positive. At a certain point, if interest rates on both sides of the border continue to rise we may see advisers becoming net sellers of fixed income, or at least opting for strategies that offer more interest rate protection."
Sentiment was also varied when it came to the Canadian versus American dollar trade: only 28 per cent of advisers reported being bullish on the loonie heading into Q1, a key driver of this low amount of bullish sentiment is probably due to the fact that the US Fed has said it will raise interest rates, where Canada could see flat or maybe decreasing interest rate increases in 2017. This creates a fairly big rate differential that can motivate currency investors to hold the US dollar.
Sentiment on gold and gold equities declined substantially from the last survey. Bullish sentiment on gold bullion declined from 49 per cent to 32 per cent and sentiment on gold equities – which was still the best-performing sector in the Canadian market last year – declined from 48 per cent to 30 per cent. Gold bullion lost about 12 per cent last quarter, and gold equities, as represented by the S&P/TSX Global Gold Index, declined about 18.1 per cent.
Bullish sentiment declined on emerging markets last quarter, from 52 per cent to 43 per cent. This is likely due to the fact that Trump's "America First" policy is likely to have direct impact on emerging market exports. The MSCI Emerging Markets Index lost about 1.7 per cent (in CAD terms) last quarter, but is already up about 3.8 per cent in early 2017 (as at 27 January 2017).
"Concerns about risk in the emerging markets might be overblown," says Hawkins. "This level of negative sentiment overlooks some of the key growth drivers in China and other energy dependent emerging markets."
Advisers were bullish on six of 14 industry benchmarks, overall a very bearish sentiment. Five out of six of these benchmarks were equity indices.