National Post (National Edition)
OLIGOPOLIES HELPING INVESTORS.
‘Deciding to park ... money elsewhere’
TORONTO •Canadaisfinding it harder to attract the foreign investment in its bonds and stocks that it needs to finance a current account deficit, as yields rise at a faster pace in the U.S. and headwinds stifle prospects for the domestic economy.
Viewed as a haven after the global financial crisis, Canada had seen over the past decade a rapid rise in the purchase of its securities by foreign investors.
But foreign purchases of its securities have slowed to $29 billion in the first five months of the year due to trade uncertainties and a slowdown in the country’s red-hot housing market. Net inflows in 2017 totalled $190 billion.
Canada runs a current account deficit of more than $60 billion annually so it imports goods and services at a faster pace than incomes are rising. If foreign buying of the country’s bonds and stocks continues to slow then its currency may need to depreciate or its borrowing costs rise to attract the foreign investment that has bolstered consumption in recent years.
“Canada is relying on the kindness of strangers to plug that current account deficit and you can see that the portfolio flows are moving in the wrong direction,” said Mark Mccormick at TD Securities.
“It is a reflection of the cyclical and structural headwinds that the economy is facing. So, people globally are deciding to park their money elsewhere.”
Headwinds include near record levels of household borrowing and reliance on trade with a more protectionist U.S. Canada sends about 75 per cent of its exports to the U.S.
“Trade (uncertainty) has caused a lot of global investors to have concerns about the volatility you will see from Canada,” said Angus Sippe at Schroders in New York, who has bet against the Canadian dollar.
The loonie has weakened nearly four per cent this year against the greenback, while the gap between Canada’s 10-year yield and its U.S. equivalent has widened by more than 60 basis points since September to a spread of nearly 70 basis points in favour of the U.S.
“If foreign confidence takes a hit, we are going to have to pay more to attract foreign investors to buy our assets,” said Sal Guatieri at BMO Capital Markets. “We are going to have to offer higher interest rates or a weaker Canadian dollar with the expectation of appreciation.”
It could become more challenging still to attract foreign investment if the European Central Bank follows the U.S. Federal Reserve and the Bank of Canada and begins raising interest rates.
“All of a sudden, the reasons that you invested in Canada in the first place as a foreigner aren’t as compelling as they used to be,” said Bipan Rai at CIBC Capital Markets.