Where bearish advisors can look for opportunity

Inflows to international ETFs in the first quarter of 2018 totalled more than $2 million, according to National Bank Financial.

In particular, emerging markets represent the biggest investment opportunity in Q2 for advisors, says Steve Hawkins, president and co-CEO of Horizons ETFs, in a release. “Especially as Canadian and U.S. equities remain somewhat volatile compared to the rest of the world,” he says.

Read: What investors should know about China’s evolving economy

His comments follow the release of Horizons’ Q1 advisor sentiment survey, which reveals that Canadian advisors have a bearish outlook on most asset classes, attributable to first-quarter volatility.

Still, the survey finds that 67% of advisors are bullish on emerging markets heading into Q2. However, that’s a slight decline from 72% who were bullish on EM during the last quarter. The MSCI Emerging Markets index was fairly level over Q1, rising 0.93%—better than the performance of many other indexes in Q1.

Advisors less bullish

On the S&P/TSX 60—down more than 5% in Q1—48% of advisors are bullish, compared to 65% who were bullish last quarter.

Advisors’ bullish sentiment for the S&P 500 also dropped significantly heading into Q2, dipping to 56% from 65% last quarter. Similarly, the percentage of advisors bullish on the NASDAQ 100 declined to 57% from 65% in Q1.

In the quarter, the S&P 500 declined 1.22%; the NASDAQ 100 rose 2.89%.

Read: S&P and TSX positioning as the cycle winds down

Bullish sentiment among most advisors heading into Q2 also declined for Canadian financials, as represented by the S&P/TSX Capped Financials index, where sentiment dipped to 50% from 63% (Q2 versus Q1 survey). The index declined 4.22% over Q1.

Of the 15 asset classes and indexes in the survey, U.S. bonds were among the few for which advisors were increasingly bullish. Bullish sentiment on the U.S. 7-10 Year Bond index (total return) rose to 27% from 16% last quarter. However, more advisors (37%) remain bearish. Advisors’ fears about rising interest rates are justified, as the performance of the index fell 1.87% last quarter.

Read: Why Canadian investors need more technology exposure

Underwhelmed by energy

Bullish sentiment in Q2 for natural gas dropped considerably, to 27%, down from 42% in Q1. Natural gas performance fell by more than 7.45% over Q1.

Expectations for energy, represented by sentiment for the S&P/TSX Capped Energy index, fell slightly, with bullish sentiment declining to 50% from 53% in Q1. The index’s performance fell significantly, dropping 8.09% by the end of Q1.

Bullish sentiment for crude oil remained flat, despite the asset’s strong performance in Q1. Q2 bullish sentiment for crude was at 45%, up slightly from 44%. The asset class was up 7.48% by the end of Q1, with the price of crude reaching US$64.17 a barrel (as at March 31).

Rising oil prices haven’t improved the outlook for Canadian energy producers. “U.S. shale producers seem to be able to pump oil at a lower cost and continue to have quicker access to that market […],” says Hawkins, which impedes the value of Canadian-producer stocks.

Read: What investors should know about oil and geopolitical risk

Bearish on loonie

On the loonie, almost half of advisors continue to be outright bearish, with 48% believing the Canuck buck will decline in value (relative to the U.S. dollar) over Q2. This is a small decrease from the 53% of advisors who were bearish last quarter. The loonie depreciated by 2.43% against the U.S. dollar over the course of Q1.

“We might see a reversal in sentiment on the Canadian dollar when Canadian interest rates pick up, or if the price of Canadian-produced oil rises higher,” says Hawkins.

For full results, see the Horizons ETFs advisor sentiment survey.