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Top TSX-tracking ETF has biggest 2017 outflow as potential rate hike nears

A Toronto Stock Exchange (TSX) logo is seen in Toronto November 9, 2007.

Mark Blinch/Reuters

Investors appear to be fleeing Canadian shares before the first potential interest-rate increase in seven years.

Traders withdrew $358.1-million ($278-million) last week from the iShares S&P/TSX 60 Index ETF, the biggest exchange traded fund tracking Canada's benchmark index. The outflow was the largest since early December, when investors were pouring into U.S. stocks following the election of President Donald Trump. Another $20.2-million was withdrawn on Monday.

Canadian equities are the second-worst performers among developed markets this year, battered by a drop in commodity prices and a looming slowdown in housing. The lag however downplays the strength of the economy, which has been growing the fastest among peers, setting the stage for the Bank of Canada to tighten rates on Wednesday.

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"Our market is unloved by global investors," Steve Belisle, senior portfolio manager at Manulife Asset Management, said by phone from Montreal. The drop in some sectors is unjustified and presents a buying opportunity, he added.

Belisle recommends buying electricity producers like Boralex Inc. and pipelines like Enbridge Inc. Even though both are rate-sensitive stocks, the market has already priced in the possibility of a hike and they are cheap relative to their global counterparts, he said.

Expectations for an increase in borrowing costs has surged to 94 per cent from 5 per cent a month earlier, based on overnight index swaps data compiled by Bloomberg. Governor Stephen Poloz will raise the benchmark rate to 0.75 per cent on Wednesday from 0.50 per cent, according to 22 of 31 economists in a Bloomberg survey, while the rest see no change. Finance Minister Bill Morneau on Monday declined to comment on the decision, but said the economy is "firing on all cylinders."

Life insurance companies have outperformed the broader market since the central bank last month first signaled its willingness to raise rates, while rate-sensitive sectors like utilities, telecoms, REITs and consumer stocks have underperformed. The S&P/TSX Composite Index is down 2.1 per cent in the same period.

A review of equity performance following Bank of Canada tightening cycles over the past dozen years shows that materials stocks tend to significantly outperform all other sectors of the Canadian market in the three months following a rate hike.

Video: Carrick Talks Money: Is Canada returning to an 'inflation nation'?
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