Foreign investors are bailing on Canada at a pace typically reserved for times of global economic distress.
Inflows into Canadian stocks from international investors have declined by about 75 per cent over the past year, as the appetite for resource investments has waned amid heightened economic anxieties.
“You have to assume this is consistent with global growth concerns,” said Martin Roberge, a portfolio strategist at Canaccord Genuity. “Canada is in the eye of the storm.”
Unless the synchronized global slowdown reverses, net inflows into Canadian equities could be quickly headed to zero for the first time since the global financial crisis a decade ago, which would not bode well for domestic stock performance.
The fortunes of Canadian stocks tend to be closely aligned with the business cycle.
When the global outlook is robust and the resources needed to sustain growth are in high demand, foreign money typically pours into Canada’s outsized commodity sectors.
When economic calamity strikes, on the other hand, investor flows can quickly change direction, with net outflows seen in the years after the dot-com bubble burst, as well as through the global financial crisis.
This time around, the U.S.-China trade war has made for a precarious growth outlook, as manufacturing activity has declined worldwide, and several countries have struggled to stave off recessions.
Last week, the International Monetary Fund downgraded the 2019 global growth forecast yet again to 3 per cent, the slowest since 2008-09.
And once again, Canada’s resource strength has turned into a weakness, with cyclical stocks falling out of favour and foreign inflows dwindling.
Investment flows can be highly volatile from one month to the next, and a trailing 12-month sum can give a clearer picture into changes in how Canada is perceived by international investors, Mr. Roberge said.
Over the year ended August, 2018, the inflow into domestic stocks totalled $27.8-billion. Since then, over the 12 months up to the end of August, that number has “shockingly” plunged to $7.2-billion, Mr. Roberge said.
While Statistics Canada does not break out those flows by sector, Canada’s oil and gas industry is a likely target for recent divestment.
On top of the challenges facing the oil market globally – an abundance of supply, sustained low crude prices and elevated scrutiny over climate concerns – the Canadian energy sector has a host of homegrown problems, lack of pipeline capacity chief among them.
Other segments of the Canadian stock market, notably cannabis companies, are not the international draw they once were.
“Health care has been the weakest performer in 2018 after being a bit of a rock star last year,” said Doug Porter, chief economist at Bank of Montreal. “That may also help explain why foreign inflows have melted away.”
Despite the decline of outside investor interest, however, Canadian equities have held up fairly well, considering the circumstances, with the S&P/TSX Composite Index rising by 6.4 per cent over the past year.
“Just like the Tragically Hip, a stock can be a winner despite foreign disinterest,” CIBC chief economist Avery Shenfeld said in an e-mail.
The pockets of strength in Canadian equities have skewed toward dividend-paying companies, such as REITs and utilities, as falling bond yields have pushed income investors into the stock market.
That rush for yield may have inadvertently pushed some foreign investors out of Canadian stocks, Mr. Shenfeld said.
“Sometimes, we see net foreign selling because Canadians are bidding away their equities out of foreigners’ hands.”
Yet another potential factor behind the trend is this year’s decline in new issuance. The TSX has had just two IPOs this year, up to the end of September, while equity capital raised has declined by 16 per cent from the same period last year, according to TMX Group data.
Historically, inflows into the Canadian stock market have been an influential force on equity performance.
Foreign inflows spiked between late 2002 and mid-2006, a period that also saw Canadian stocks outperform U.S. stocks by a wide margin.
On the other hand, ever since inflows peaked in mid-2014, Canadian stocks have barely advanced, even underperforming cash over that time, by most measures.
“Usually, the bottom in will also mark a sustained bottom for the market,” Mr. Roberge said. “We’re not there yet.”
Tim Shufelt