Global investors dumping Canadian assets

Canada looked like a pretty good investment coming out of the global financial crisis. The banks were in decent shape and the housing market didn’t collapse. Foreign investors saw it as a safe bet.

That bloom appears to have fallen off the rose. New data shows foreigners are pulling their money out of Canada in droves.

Foreign investors cut back on their Canadian securities holdings by $15.4 billion in June, which Statistics Canada says is the largest drop since October 2007.

Turns out it was Canadian bonds that investors were dumping at a record level of $19 billion in June according to StatsCan, "marking the first divestment in 2013."

Government bonds were the main exit point, in particular federal government and its business enterprise bonds as well as some provincial government bonds, StatsCan says.

"Much of the outflow was due to foreign investors choosing not to reinvest coupon payments and maturing bonds back into Canadian securities," noted BMO Capital Markets senior economist Benjamin Reitzes.

The move comes as the U.S. economy begins its slow recovery, causing the Canadian dollar to depreciate against the American greenback. Economists predict the appetite for Canadian bonds to return, but it could be a few years as the economy rebalances and governments begin paying down debt.

Reitzes says the flight from Canadian bonds is tied to a similar exit from U.S. treasuries, as the Federal Reserve signals it will start to cut back on measures to help prop up the American economy.

"Treasury and [Government of Canada] yields move largely in sync, suggesting fears of a backup in Treasury yields would hit Canada's as well," he says, noting the amount of foreign investment into Canada has slowed over the past 12 months to $64.2 billion, down from a peak of more than $110 billion in early 2011.

The pullback in Canadian investment is certain to fuel the "short Canada" crowd that has been making headlines in recent months.

These are investors that are hoping to make money off bets the Canadian housing market is set to collapse, alongside a drop in equities and bank stocks. It has created a cross-border war of words, with Canadians largely defending the home turf. Most economists are calling for a “soft landing” in the Canadian housing market and expect modest growth in the economy in the months ahead.

Despite the ongoing battle, Canadians don’t appear to be holding a grudge against foreigners, adding $3.7 billion in international securities to their portfolios in June. That’s after selling off about $1.7 billion in foreign investments in May, StatsCan says.

“Canadians have been scooping up foreign assets at an increasing pace,” Reitzes says.

TD Bank economists Sonya Gulati and David Tulk say it's time for Canada to take a back seat to the U.S., but the news isn't entirely bad.

"The export-based nature of the Canadian economy stands to undoubtedly reap the rewards if the U.S. economy accelerates and economic growth, even modest growth, is restored in the euro zone," the economists said in a note on Tuesday.

"All else equal, the differences in economic growth across the two countries could mean that global investors look outside Canadian bonds and equities to maximize their overall portfolio returns. This should only be a knee-jerk reaction. Demand for Canadian corporate bonds and equities ought to perk up as Canadian economic fortunes improve."