'Sell Canada' runs out of gas as foreigners rediscover their faith in Canuck investments
After rough end to 2014, foreign appetite for Canadian investments has rebounded, bank says
After a rough patch at the end of 2014, foreign money appears to have regained its confidence in Canada's economy and is once again pouring into Canadian stocks, bonds and real estate, TD Bank says.
In a report on Wednesday, the Canadian bank said that while Canada was an economic darling of the world in the scary days following the Great Recession because of the country's reputation for safety, the notion of "short" or sell Canada became a growing theme as oil prices collapsed in the second half of 2014.
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Since then, however, the world has rediscovered its faith in Canadian investments, it seems. "Data so far in 2015 show that investor flows into Canada have remained resilient and sentiment on the Canadian dollar has picked up," the bank says.
After declining to close out last year, foreign ownership of Canadian stocks has increased every month this year for which there is data, from a net of roughly $5 billion in January to more than $25 billion in March.
There may have been a giant sucking sound of money leaving the oilpatch since last fall, but beneath the surface it appears foreign investors have quietly rediscovered their appetite for Canadian companies that don't involve oil, such and banks, insurers, tech companies and manufacturers.
Bonds popular too
Beyond stocks, "where foreign buying has been more resilient, and has gained significant momentum in recent months, is in bond purchases," TD says.
Canadian companies took advantage of cheap borrowing rates by issuing $40 billion worth of new bonds in the first quarter, much of which was to foreign investors in currencies that aren't the Canadian dollar. When combined with the amount of new stocks issued, together they set a new quarterly issuance record, TD noted.
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Add it all up, and foreigners own roughly a third of all the outstanding bonds in Canada, and about half of the corporate ones. Canadian government bonds, meanwhile, are becoming more attractive for foreign investors, not just because of Canada's AAA credit rating, but also because the loonie is increasingly being adopted as a reserve currency — meaning the central banks and governments of other countries are increasingly starting to hold it.
"The May 2015 federal budget, which trumpeted a return to a balanced budget and the relatively low overall public debt burden, has only helped to keep government bonds [popular]," TD said.
Housing market
Another side of the story is what's happening in the housing market. "One asset class that the … media love to hate is Canada's housing sector," TD said. Canada's housing market is often described as one of the most overvalued in the world, set to crash at any moment.
Except that consistently doesn't seem to be playing out in reality, the bank says. Housing data through 2015 so far, at least, isn't bearing that out — with the exception of oil-dependent Alberta.
The topic of foreign money in Canada's housing market is a contentious one, mainly because it's difficult to come up with an accurate number of how much there is. Recent attempts to pin a number on it by the CMHC and the Bank of Canada were met with skepticism, but each found that the proportion of foreign owners was comparatively small, but growing.
"If money originating from outside of Canada finds housing in Canada too risky, it doesn't seem to be driving a cooling in either of these major urban markets yet," TD says.
Loonie's rebound
One final chapter in TD's turnaround story for Canada is the loonie. While Canadians are keenly aware that, at around 80 cents US, the loonie buys a lot less than it used to, the reality is that Canada's dollar is holding up fairly well on a global level.
Simply put, the U.S. dollar has been skyrocketing against just about everything, and the loonie is doing a better job than most at minimizing the damage. Over the last 12 months, the loonie has done better than both the euro and the yen, and is just about tied with the pound, when compared to the U.S. greenback.
Currency speculators who, TD says, "have spent the vast majority of the last two years shorting the Canadian dollar" are starting to hedge their strategy and bets in favour of the loonie now outnumber bets against it for the first time since last July, the bank notes.
"While the plunge in oil prices in 2014 soured investor sentiment initially, particularly for Canadian equities, interest appears to be picking up," TD says. Considering the factors in our favour "should help to keep Canada relatively attractive to foreign investors," the bank says.