Canadian firms looking abroad
Loonie must drop further to stop the drain
This is Canadian investors that are pushing money abroad. ALVISE MARINO
Money is flooding out of Canada at the fastest pace in the developed world as the nation’s decade-long oil boom comes to an end and little else looks ready to take the industry’s place as an economic driver.
Canada’s basic balance — a measure of national accounts that spans everything from trade to financial-market flows — swung from a surplus of 4.2 per cent of gross domestic product to a deficit of 7.9 per cent in the 12 months ending in June, according to analysis from Kamal Sharma, a foreign-exchange strategist at Bank of America Merrill Lynch. That’s the fastest one-year deterioration among 10 major developed nations.
More recent data on where companies and mutual-fund investors are putting their money show the trend extended into the second half of the year, suggesting demand for the Canadian dollar and the country’s assets is still ebbing. The currency is already down 11 per cent this year, after touching an 11-year low against the U.S. dollar in September.
“This is Canadian investors that are pushing money abroad,” said Alvise Marino, a foreignexchange strategist at Credit Suisse Group AG in New York. “The policy in Canada the last 10 years has greatly favoured investments in energy. Now the drop in oil prices made all that investment unprofitable.”
Crude oil, among the nation’s biggest exports, has collapsed to about half its 2014 peak. The slump has derailed projects this year in Canada’s oilsands — one of the world’s most expensive crude-producing regions. Royal Dutch Shell PLC’s decision to put its Carmon Creek drilling project on ice last week lengthened that list to 18, according to ARC Financial Corp.
FOREIGN LURE
Canadian companies, meanwhile, have been looking abroad for acquisitions. Royal Bank of Canada on Monday closed its $5-billion purchase of Los Angeles-based City National Corp. Monday, its biggest-ever takeover. It’s part of a net outflow of C$73 billion this year for mergers and acquisitions, both completed and announced, according to Crédit Suisse data.
Nine of the 10 best-performing companies on the country’s benchmark stock index in the past two years have favoured buying growth abroad rather than expanding at home, from Valeant Pharmaceuticals International Inc. to Alimentation CoucheTard Inc.
Individuals are following suit. While international appetite for Canadian financial securities has held steady this year, domestic mutual-fund investors have pulled money from Canadafocused funds and plowed it into global choices for six straight months, the longest streak in two years, according to Investment Funds Institute of Canada data compiled by Bank of Montreal.
LOONIE IMPLICATION
What it all means is the Canadian dollar has to get cheaper still to make Canadian businesses outside of the oil industry competitive enough with foreign peers to make them worth investing in, according to Benjamin Reitzes, an economist at Bank of Montreal.
The median forecast among strategists surveyed by Bloomberg has the loonie weakening to $1.34 per U.S. dollar by the first three months of next year from about $1.31 now. The country’s economy is expected to lag behind the U.S., its largest trading partner, for the next two years, according to the median estimate of a separate Bloomberg poll.
While manufacturing and service exports have improved thanks to the Canadian dollar’s depreciation already, they remain below levels from before the financial crisis, according to Royal Bank of Canada foreign-exchange strategist Elsa Lignos. That suggests the country still hasn’t won back the economic capacity it lost, she wrote in an Oct. 29 note.
The country is expected to post its 12th straight merchandise trade deficit this week, according to every economist in a Bloomberg survey.
Given that the loonie was at parity with the U.S. dollar as recently as 2013, overseas companies and investors debating whether to put money into Canada may be waiting to see that the currency stays weak before investing again, according to BMO’s Reitzes.
“Maybe a year from now you don’t have that conversation because it’s been there for a year and you have confidence it’s going to stay there, so you buy that plant or make a new plant in Canada,” he said. “It takes time for that currency impact to be felt.”