It’s far too early to say money managers believe the worst is over, but it certainly seems they have regained their resolve to buy stocks, a new report by Russell Investments suggests.

More than 70% of Canadian managers expect positive returns for the S&P/TSX in 2009, according to the Russell Investment Manager Outlook poll for the fourth quarter. Further, 90% of managers surveyed believe the TSX is either fairly valued or undervalued.

It’s important to note bullish sentiment is not being born from any new developments in the Canadian market; rather, managers don’t see how things can get any worse. Confidence is forming from a growing belief that if there’s any more risk to Canadian equities, it’s likely priced in.

“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 S. Adatia, chief investment officer of Russell Investments Canada Limited. “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.”

Does this mean investors can expect to recoup the damage this bear market has brought in 2009? Likely not, the poll concludes. Managers seem to be leaning toward a slow and methodical recovery over the next year. More than 40% of respondents expect the Canadian market to bounce back more than 10%—an impressive comeback—but this is against a backdrop of near 40% losses for 2008.

Naturally, some of the most beaten-up sectors are now the most attractive for the coming year. More than half of the managers polled have bullish sentiment on Canada’s dividend-rich financial services sector and the materials sector.

“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 Adatia. “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 has nearly doubled 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,” Adatia says. “In addition, fertilizer giant Potash is trading at a fraction of former levels, but global supply/demand fundamentals remain strong. Oil at US$150 may have been too high, but oil below $50 may well be too low. Bullish sentiment towards energy is at 42% of managers, with bears dropping precipitously from 63% to 32%. Even if demand for oil is down, the current low price is likely to squeeze exploration and production activity and lead to an upward correction.”

A recent report from Merrill Lynch opines that 2009 may be marked by a lengthy range-bound market marked by heavy volatility. It’s not an ideal market for investors, but unlike the devastating bear market currently being experienced, it does provide some opportunity to make money.

Merrill Lynch’s chief U.S. market analyst, Mary Ann Bartels, expects a range-bound global market, with U.S. equities likely leading the way and conservative outperformance over the rest of the world.

The most important news is that the worst is likely over. Bartels highlights that historically a market bottoms five months prior to the end of a recession. The National Bureau of Economic Research says the U.S. has been in recession since 2007. If this recession goes 18 months—long by historical standards—that would suggest the market has hit bottom or will do so in the early part of next year.

“By comparison, 2009 is likely to be more mundane (than 2008), but investors will probably maintain a conservative approach to the market,” she says. “And well they should. In our view, the market began a basing process in October. We have maintained that this process will take time (measured in months), will require patience and will likely involve exciting rallies that are followed by multiple tests of the lows.”

Bartels forecasts that large-dividend-yielding stocks will lead the way next year, as investors look to get paid to wait out market volatility. In addition, she expects U.S. companies to have relative outperformance of 11% to 18% over the rest of the world. She notes that the MSCI U.S. index made a “double bottom” relative to the MSCI World (excluding U.S.) index. From May to October, the MSCI U.S. index fell 30% while the world index fell by 43%.

“This U.S. relative strength rally appears to be cyclical in nature; improving long-term relative momentum is still on the oversold side of neutral and appears to have the potential to maintain an overall bullish bias through most, if not all, of 2009,” she says. “This U.S. relative strength has already decisively reversed the prior six year (2002–2008) relative downtrend. In our view, the U.S. may be little better than halfway through its relative uptrend versus the rest of the world in terms of both price and time.”

Filed by Mark Noble,, is the sister site to, focusing on the needs of the financial advisor serving the retail investor.

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