To be blunt, the investment environment in Canada has become downright
chilly. Figures from Statistics Canada for 2017 show that foreign direct
investment into the country fell to the lowest since 2010, dropping 26%, to
C$33.8 billion. This is the second year that flows have dropped and are
down more than 50% since 2015.
Net foreign purchases of Canadian corporations also turned negative for the
first time in a decade (meaning that foreign companies sold more Canadian
companies than they bought). High profile exits from ConocoPhillips and
Royal Dutch Shell led the capital exodus last year.
The above underscores the impact of a lingering commodity slump and the
declining attraction of Canada as an investment destination. And while
energy prices have recovered somewhat, prolific shale plays in Texas and
Oklahoma are following through with their own investment boom, while the
oil sands have fallen out of favor. What’s more, the additional headwind of
growing U.S. protectionism and worries about the fate of the North American
Free Trade Agreement has foreign capital on hold.
All of the above is clearly a major setback for Trudeau’s Liberal
government, which has continually emphasized attracting foreign investment.
Outlook for Canada remains constrained
To be sure, not everyone is suffering. Canada’s unemployment rate hit the
lowest level in four decades in February. And, while Trudeau’s “sunny
ways,” “responsible deficits,” and a potential lift from Trump-induced
fiscal stimulus have engineered some optimism, the cyclical outlook is
The Bank for International Settlements has even singled out Canada as one
of three countries in the world vulnerable to a credit crisis, given
maxed-out credit cards and extreme household debt levels in the wider
economy (the country’s ratio of household debt to disposable income reached
a record 171% in the third quarter of 2017).
Our central bank also recognizes macro risks. Governor Stephen Poloz,
delivering a speech to his alma mater Queen’s University (wearing a 1978
Queen’s maroon leather jacket nonetheless), observed, “… there remains a
degree of untapped potential in the economy. It means Canada may be able to
have more economic growth…without generating higher inflation.”
Translation: The economy is not yet on solid footing – the punch bowl is
here to stay for some time.
Canadian assets have fallen out of favour on the world scale. And while
Canada is not just a petro-country, international capital will remain on
the sidelines until firm evidence surfaces that economic growth is on a
more sustainable path and some policy uncertainty is removed (not least of
which is clarity on NAFTA). That makes it difficult for Canadian stocks,
bonds, and the currency to catch a lasting bid. Meanwhile, concerns over
household debt, investment activity, business formation, and trade will
keep our country’s central bank committed to a very gradualist approach,
providing less appeal for global bond investors.
Of course, as we have reminded readers for some time, Canadians continue to
be overexposed to domestic assets. However, change is happening at the
margin, as many Canadians now scramble to embrace global diversification.
In fact, Canada is now a creditor to the U.S. for the first time on record,
reflecting Canada’s renewed love affair with assets south of the border.
Expect this trend to widen to investments outside of the United States. A
secular portfolio shift has begun.
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in Forstrong’s
Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at
. Follow Tyler on Twitter at
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