Seeing the Trump administration turn hostile toward Canada has been enough to make global investors run in the opposite direction. A record $35-billion in foreign money was withdrawn from the Canadian stock market in the first quarter, according to new data from Statistics Canada.
It’s not a huge surprise, considering how much Canada’s economic status quo crumbled in those three months, as U.S. President Donald Trump came back into office with scores to settle and Canada in his crosshairs.
Furious tariff threats, endless talk of annexation, and general economic belligerence appear to have gone a long way to making Canada uninvestible in the eyes of global investors.
“You can’t really blame foreigners for being gun-shy to invest in Canada,” said Martin Roberge, portfolio strategist at Canaccord Genuity. “It’s a situation people are not willing to bet on. They’d rather wait and see.”
What is surprising, however, is that the exodus of international investors didn’t seem to cause much damage on the Toronto Stock Exchange. The S&P/TSX Composite Index eked out a small gain on the quarter.
Even while foreigners fled, Canadian investors stepped into the breach.
“Patriotic investing” may have played a part, Mr. Roberge said. So outraged were some retail investors that they liquidated their U.S. holdings and redirected that money to Canadian companies.
But the bigger factor was probably the selloff in U.S. stocks, which saw the S&P 500 index lose 19 per cent in less than two months. Big Tech was pounded over this time, as the Magnificent Seven stocks dropped by around 30 per cent as a group.
Lots of Canadian investors with large holdings of U.S. stocks and big paper gains from two years of blockbuster returns likely took profits and brought that money home.
It’s also peculiar that foreign bond investors have not lost their appetite for Canadian securities.
Despite Canada’s monumental economic challenges, the country still has the faith of the fixed-income world.
Fears over U.S. public debt levels and huge government deficits don’t really apply here. Canada still has the top triple-A rating that credit ratings agency Moody’s stripped from the U.S. on Friday.
Even with a recession on the horizon, or possibly here already, Canada has the fiscal room to weather a downturn without putting its credit worthiness at stake. This may explain why non-residents acquired nearly $50-billion of Canadian bonds in the first quarter, continuing a buying streak that has seen American investors load up on Government of Canada paper.
“This is one export we can’t take for granted,” Warren Lovely, chief rates and public-sector strategist with National Bank of Canada, wrote in a recent note. With around 40 per cent foreign ownership, never before has more of the national bond stock been held outside the country.
Stock investors are a more fickle lot. They saw radical uncertainty shrouding the Canadian economy and they got spooked.
Foreign participation is an important component of Canadian equity performance. History shows that these flows wax and wane in close alignment with the fluctuations of the market.
What would bring them back to Canada? Easing of tariffs would probably help. With the U.S. maintaining tariffs on Canadian steel, aluminum and goods that are not compliant with the continental free-trade agreement, Canada is facing an effective tariff rate of about 12 per cent.
Progress on trade negotiations with the U.S. would also go a long way to attracting global investors, Mr. Roberge said.
Until then, we’ll see if Canadian investors can continue to keep the TSX afloat.
