Advisors bullish on U.S. and Marijuana Stocks

Canadian investment advisors continue to have a bearish outlook on Canadian equities going into the third quarter of 2018, according to the Q3 2018 Advisor Sentiment Survey (“Q3 Survey”) conducted by Horizons ETFs Management (Canada) Inc. (“Horizons ETFs”).

The Q3 Survey asked Canadian investment advisors for their expectations of returns – bullish, bearish or neutral – on 14 distinct asset classes for the upcoming quarter (“Q3 2018”), which ends on September 30, 2018.

Only 47% of Canadian investment advisors were bullish on Canadian equities – slightly lower than the 48% of advisors who stated they were bullish on the S&P/TSX 60™ Index, as indicated in the previous Q2 Advisor Sentiment Survey (“Q2 Survey”). Despite the bearish sentiment, Canadian equities had a very strong second quarter, primarily due to the solid run in Energy prices, with the S&P/TSX 60 Index generating a 6.2% return.

This generally bearish outlook extended to the other surveyed Canadian sectors, with the exception being the S&P/TSX Capped Energy Index, where 55% of Canadian advisors were bullish on the outlook for energy related equities. The S&P/TSX Capped Energy Index generated a 16.25% return last quarter.

Advisors were also bullish on Crude Oil, as represented by WTI Crude Oil Futures, with 53% of advisor respondents suggesting that oil prices will continue to rise in Q3. Advisors were not as bullish on Natural Gas, with only 35% expecting natural gas prices would rise. Natural gas futures contracts were up nearly 7% last quarter.

“One cause for weaker performance expectations may be related to recent Canada/U.S. tariffs and an ongoing climate of concern surrounding the fate of NAFTA,” said Steve Hawkins, President and Co-CEO of Horizons ETFs. “NAFTA apprehensions don’t have any real impact on the price of crude oil, which was up another 14% last quarter. Canadian energy producers continue this reversal-of-fortune from previous quarterly surveys, where investors were generally bullish on Canada, but bearish on Energy stocks.”

High Expectations for Marijuana Stocks

While not technically a Canadian sector, but certainly a sector dominated by Canadian stocks, the Marijuana sector, as represented by the North American Marijuana Index, had the highest level of bullish sentiment, with 58% of advisors expecting Marijuana stocks to deliver positive returns in Q3. This index was up 5.78% from last quarter, with much of that performance coming from the announcement of final dates for the legalization of recreational marijuana in Canada.

“October 17, 2018 is the date that many marijuana investors have circled on their calendars, as this is when recreational marijuana will become legal in Canada,” said Mr. Hawkins. “Since this sector is such a news-driven space, many advisors may be expecting the sector to get a big bump in interest as we near the big day.”

Advisors Stay Bullish on the U.S.

Outlook on U.S. equities remained in-line with the Q2 Survey results with 56% of responses indicating bullish sentiment. The S&P 500® Index underperformed Canadian equities last quarter, delivering a modest return of 2.93%. The technology-focused NASDAQ-100 fared much better, delivering a 6.98% return on the quarter. Subsequently, 57% of advisors were bullish on U.S. equities.

Advisors are also favouring the U.S. dollar vs. the Canadian dollar, with 56% of advisors outright bearish on the Canadian dollar vs. the U.S. dollar. Sentiment on fixed income was mixed however, with only 26% of advisors bullish on U.S. treasuries, 36% neutral and 34% bearish. The bearish sentiment on bonds is likely due to the fact that the U.S. Fed continues to raise interest rates. Typically, rising interest rates are beneficial for currencies, but negative for bonds, which might explain the opposing opinions.

“The relative outperformance of Canadian equities vs. U.S. equities last quarter seems to have taken advisors by surprise. Despite this, they’re still optimistic that the U.S. will generate relative outperformance vs. Canada,” said Mr. Hawkins. “When it comes to currency, NAFTA and rising interest rates are probably weighing heavily on the minds of advisors – the majority of whom are bearish on the loonie. While the U.S. offers higher interest rates, it’s hard to see the Canadian dollar outperforming the U.S. dollar unless we see a sustained rally in crude oil prices.”

One of the most significant reductions in bullish expectation was the Emerging Market equities outlook (as represented by the MSCI Emerging Markets Index). Bullish sentiment declined by nearly 25%, with only 43% of advisors indicating a positive forecast for the global index comprised of Emerging Markets across the Americas, Europe, Africa, Asia and the Middle East. The MSCI Emerging Markets Index lost nearly 9% last quarter.

“Emerging Markets were on a tear for most of early part of 2018, but that run came to a staggering halt with the escalating trade tensions between the U.S. and China,” Mr. Hawkins said. “Fundamentally, not much has changed in terms of the earnings being generated by these companies, but investors are clearly concerned about the economic impact of U.S. tariffs on Chinese goods.”