InFocus: Global Macro 2.0

Why Canada's investment environment is “downright chilly”

Why Canada's investment environment is “downright chilly”

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When the multi-year commodity boom came to a screeching halt in 2014, Canada was hit hard. So hard, in fact, that the domestic stock market is still feeling the aftershocks. Foreign capital began to flood out of the market and those flows have yet to be staunched.

Figures for 2017 show that foreign direct investment into the country fell to the lowest since 2010, dropping 26% to $33.8 billion. It was the second year flows had dropped, and they are down more than 50% since 2015. Net foreign purchases of Canadian corporations also turned negative for the first time in a decade last year.

“The investment environment in Canada has become downright chilly and investors are realizing that the country is not as diversified as people once thought,” explains Tyler Mordy, President & CIO at Forstrong Global. “The objective of a modern portfolio is to provide the best diversification possible and even Canadian investors are now looking to add different components, which could mean the US or emerging markets.”

Canada is struggling to shake the image of being a less than attractive investment destination. Although energy prices have recovered somewhat, shale plays in Texas and Oklahoma are enjoying their own investment boom, while the oil sands have fallen out of favour. “What’s more, the additional headwind of growing US protectionism and worries about the fate of the North American Free Trade Agreement has foreign capital on hold,” Mordy says. “All of the above is clearly a major setback for Trudeau’s Liberal government, which has continually emphasized attracting foreign investment.”

Canadian assets are firmly out of favour on the world stage. With international capital expected to remain on the sidelines until evidence surfaces that economic growth is on a more sustainable path, the conditions do not look good for Canadian stocks, bonds and the currency. In addition, as Mordy explains, concerns over household debt, investment activity, business formation, and trade will keep the country’s central bank committed to a very gradualist approach, providing less appeal for global bond investors.

For domestic investors, the importance of looking further afield has never been more pressing. “Canadians continue to be over-exposed to domestic assets, although change is happening at the margin, as many Canadians now scramble to embrace global diversification,” Mordy says. “In fact, Canada is now a creditor to the US 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.”

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Founded in 2001, Forstrong Global Asset Management Inc. manages money on behalf of individuals, financial professionals and institutions. Our multi-asset global macro thematic approach has demonstrated the ability to safely steward client assets through challenging markets and economic environments. Forstrong is part of the Industrial Alliance Insurance and Financial Services Inc. (TSE: IAG) family of wealth management companies, which together serve over $100B in client assets.