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Canuck investors bullish on Canadian investment opportunities

Liam Lahey

The global economy continues to wane, prospects for growth seem bleak, and financial markets are seemingly in a constant state of flux. But apparently the average Canadian investor sees it all through rose-coloured glasses and the bulls among us will tell you there's no better time to invest.

How is this possible? Canada is not an island unto itself in a globalized financial world. Yet our nation's economic outlook is said to be positively glowing when looking above and beyond fluttering unemployment figures, fluctuating consumer confidence levels, and corporations that continue to hoard cash.

Perhaps then it should come as little surprise that a BMO Harris Private Banking study finds when it comes to Canadian financial markets we're an optimistic bunch. It finds three-quarters of its respondents (74 per cent) are rather upbeat about Canadian financial markets but more than 40 per cent have a pessimistic view about what the future holds for global financial markets.

"Canadians, not surprisingly, have a fairly optimistic tone to their comments … they're probably referencing the federal fiscal situation where we're pretty close to running a federal budget surplus," says Paul Taylor, chief investment officer, BMO Harris Private Banking in Toronto. "What's interesting is they extrapolate that to the Canadian financial markets. I think their view is that, plus the strength of commodity price positions, Canada is doing quite well."

RBC Economics Research also predicts modest growth ahead for the Canadian economy. In fact, in its latest Economic Outlook, RBC states there'll be employment gains, brisk housing market activity and increasing business investment for the latter half of this year.

Domestic sectors to perform well?

Canadians also feel confident about the performance of several domestic industry sectors, with 49 per cent expecting the energy sector to grow in the coming years and 48 per cent expecting the same from the information technology sector.

The Canadian energy sector, however, faces hurdles -- one such hurdle is the U.S. labelling the Alberta oilsands as 'dirty oil'.

"It's a good and bad news situation. The good news is we have an abundant supply of fossil fuels. The bad news is extracting fossil fuels in any technique there are externalities related to it," Taylor continues. "But people recognize we're sitting on huge oil deposits. Our American friends point out that having access to oil in politically stable regions right on their doorstep is a good thing."

Investment managers also bullish on Canada

It's not only Canadian investors who are optimistic about home-grown prospects. Canadian investment managers have become increasingly bullish on Canadian equities as valuations have fallen suggests the latest "Russell Investment Manager Outlook".

In the second quarter, an estimated 70 per cent of investment managers are considered bullish on Canadian equities, while only 25 per cent are bearish. By comparison, 56 per cent were bullish in the first quarter and only 43 per cent were bullish a year ago at this time.

"The sell-off in April and May has improved valuations and that has led to increased bullishness in Canadian stocks," says Greg Nott, chief investment officer, Russell Investments Canada Limited. "In addition, despite gaining in the first quarter, Canadian equities lagged their global counterparts in that period, making their relative valuations even more attractive."

Assessing the Canadian market as a whole, 73 per cent of investment managers say it is undervalued. That is a big shift from the previous quarter, when only 17 per cent of investment managers thought the Canadian market was undervalued.

Canadians too optimistic for own good?

But there's still much for investors to be wary of. Respondents to the BMO Harris study say they're concerned about the sovereign debt crisis in the Eurozone (23 per cent), slowing growth in China and India (eight per cent) and tensions in the Middle East (7 per cent).

"Obviously the Eurozone is a challenge and its affect on the global economy and in particular the U.S. economy is important," Taylor says.

Taylor cautions investors reading too much into optimistic outlooks. He predicts a bear market for Canada in the months to come.

"There's definitely a more bearish tone than what we saw a quarter or two ago. In particular, the continued cloud related to the Eurozone issues continues to dampen global economic activity," he says. "It has already altered consumer and corporate behaviour. Canadian equity managers, I would argue, are more bearish now than they were three to six months ago."

An investment outlook report prepared by the University of Waterloo takes a cautious view of Canadian equity markets in 2012. The Bear and Bull Media Group at UW warns of weakness for Canadian stocks since most are heavily weighted in the energy, financial and material sectors which are cyclical and are vulnerable to heavy selling when panic ensues in the financial markets. The paper also states Canadian macroeconomic conditions are weakening. "The lack of defensive sectors in the Canadian market could pressure its returns in 2012 just like it did in 2011."

An unrelated survey of Canada's financial advisors released recently finds the threat of a sluggish Chinese economy to be a greater threat to Canada than what's unfolding in the Eurozone.

"If we have a bad outcome in the Eurozone then the global economy will be affected and commodity prices will be negatively impacted and 50 per cent of our market is directly tied to commodities," Taylor continues. "Similarly, because China is the marginal buyer of key commodities, we're concerned about the health of the Chinese economy."