Foreign investors sell Canada: StatsCan

Sell, sell and sell. That’s what non-Canadian investors chose to do with their holdings of Canadian securities during the month of October. According to Statistics Canada, non-residents reduced their holdings of Canadian securities by a record $24.3 billion during the month.

Canadians also showed little love for domestic securities. StatsCan says with the Canadian dollar near its record high, Canadians bought $4.8 billion worth of foreign securities, equally split between bonds and stocks.

But it was not the dollar that fuelled the foreign sell-off in Canadian securities so much as merger and acquisition activity.

Since 2006, there has been a massive amount of M&A activity in Canada, which has led to large amounts of foreign portfolio holdings of Canadian shares being sold to direct investors. StatsCan notes this has meant an increase in the stock prices of many Canadian equities — the Canadian stock market recorded a gain of nearly 20% between October 2006 and October 2007 — creating an attractive selling environment for investors.

Non-residents were particularly keen to sell Canadian bank stocks, StatsCan says, but they still see value in the Canadian resource companies. Foreign investors bought $1.3 billion worth of Canadian equities in October, which were mainly concentrated in the resource sector.

Canadian equity investors chose to put their money in foreign stocks during October, particularly in companies based in the U.S. StatsCan says Canadians placed $2.7 billion into foreign equities during the month, $2.2 billion of which was in U.S. stocks. Investment in non-U.S. shares made up the balance of the investment, after a small drop in September.

When it came to Canadian-issued bonds, foreign investment was slightly positive. Non-residents bought $88 million in bonds, due to favourable corporate bond rates.

According to StatsCan, new issues spurred foreign investment in bonds issued by federal government enterprises and private corporations to the tune of $1.5 billion and $1.6 billion, respectively. StatsCan points out new issues of corporate bonds were all U.S.-dollar-denominated with attractive yields.

Foreigners sold off $2.1 billion of their holdings of Government of Canada bonds, equally split between net retirements and sales of outstanding bonds. StatsCan notes the sales were mainly in bonds with term-to-maturity of two years or less. Non-residents still continued to acquire bonds with longer term-to-maturity.

In particular, investors from the U.S. were keen to dump their Canadian bonds, selling $2.3 billion worth. StatsCan speculates the rapid appreciation of the Canadian dollar and a rally in North American stock markets may have drawn investors’ attention away from outstanding Canadian bonds.

Conversely, Canadian investors piled into U.S. treasury bonds. Of the $2.3 billion in bonds Canadians purchased, $1.6 billion were in U.S. government bonds, according to StatsCan.

Canadian buyers were particularly interested in shorter-term U.S. treasury securities. StatsCan says the long-term interest rate differential between Canada and U.S. 10-year benchmark bonds narrowed, but the yield spreads between two-year benchmark bonds widened as investors favoured shorter-term U.S. government bonds.

Canadian investors appear to be following a global trend of buying U.S. government bonds. According to a report released Monday by BMO Economics, foreign investors also bought $50 billion worth of U.S. treasuries in October — the most in any month in almost two years and only $2 billion off the record monthly high of $52 billion. BMO says liquidity seems to have been the key attraction.

The U.S. actually had a good month overall in October. The BMO report says net purchases of long-term securities totalled $114 billion in October, a near $100 billion improvement from the prior month, which is surprising given the beleaguered U.S. dollar.

“The turnaround in net capital flows seems at odds with the month’s continued depreciation of the U.S. dollar, which slipped to record lows against the major currencies, suggesting that downward pressure on the greenback was more speculative than anything else,” the BMO report said.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(12/18/07)

Mark Noble