Canadian stocks expected to continue record ride: survey

The market exuberance in Canada appears to be contagious, with more investment advisors now bullish on the performance of stocks here versus the U.S.

A new survey of the people who manage and offer advice on our money shows growing optimism in the performance of Canadian equities and commodities.

According to the survey released by Horizons ETFs Management Canada, 61 per cent of advisors see the S&P/TSX 60 Index moving higher in the third quarter, a significant leap of faith from 47 per cent in the second quarter.

The advisors haven’t turned on the U.S. markets, but their expectations only improved slightly, from 57 per cent who were bullish on the S&P 500 for the third quarter, up slightly from 53 per cent in the previous quarter. The respondents, which included 163 advisors from across Canada, are expecting more volatility from U.S. equities in the current quarter and are focusing on domestic assets classes to get better returns for their clients.

"Canadian advisors are seeing a lot more value in domestic asset classes than their U.S. counterparts,” said Horizons ETFs president Howard Atkinson. "With the bull run we've had in the U.S. since December, advisors believe that U.S. equities are overvalued, whereas the Canadian market is ripe for growth and returns."

Canada’s benchmark S&P/TSX Composite Index has returned about 23 per cent over the past year, and 14 per cent year-to-date, hitting a record along the way. That compares with the 17-per-cent return for the U.S.-based S&P 500, or 8 per cent so far this year.

The U.S. markets outperformed Canada in 2013, and some market watchers believe it’s Canada’s turn to catch up. Others worry the markets across North America are getting ahead of themselves, and believe a correction could come at any time.

Most of the optimism among advisors in the Horizons survey was with financials, gold and base metals and energy, in particular natural gas.

For example, 70 per cent of Canadian advisors are expecting advances in the S&P/TSX Capped Energy Index, versus 53 per cent in the April-June period.

There was also a 12-per-cent increase in positive sentiment for the S&P 500 VIX Short-Term Futures Index, where 54 per cent of advisors felt positive about the Index going into the third quarter.

"The positive expectations for a turnaround in VIX futures suggests that advisors are expecting more volatility in the U.S. marketplace in the upcoming quarter," Atkinson says. "This explains why bullishness on the U.S. equities has been muted, and we've seen an uptick in commodities and precious metals expectations heading into Q3."

Gold also receiving some positive sentiment, with 46 per cent of advisors believing the gold would go up in the third quarter, compared to 46 per cent this spring. About 50 per cent think the S&P/TSX Global Gold Index will see gains, up from the 42 per cent in the last quarter.

Atkinson says that again is due to increased expectations for volatility, which is pushing advisors to become more bullish on precious metals, such as gold and silver. Gold has been a disappointment in recent years, falling more than 30 per cent since its record above $1,900 (US) per ounce in 2011. The metal is seen as a safe-haven currency and tends to rise on uncertainty and fall when the economy picks up.

"Regardless of gold's price performance, gold equities are expected to retain their value in a potential stock market correction,” says Atkinson.

The positive market sentiment comes despite a recent report showing Canadian consumers are more pessimistic about the economy and job creation. The Conference Board’s latest survey for July says confidence is low in most parts of the country, except the West, where the economies are growing faster driven by the production of natural resources, mostly oil and gas.

"Although the economy has more than recovered all the jobs it lost during the recession and the unemployment rate has trended down in the past few years, consumers appear not to have noticed, or they have no faith that the trend will continue,” the Conference Board states.