Foreign investors are set to be net sellers of Canadian equities this year for the first time since 1995. However, they also continue to gradually increase their holdings of Canadian bonds.

BMO Nesbitt Burns points out that non-residents reduced their holdings of Canadian stocks by $1.3 billion in September, “aggravating the slide in prices that touched bottom in early October”. This selling pushes the year-to-date net outflow to $3.8 billion, a big turnaround from the 1996-2001 period when net inflows averaged more than $1 billion per month.

BMO notes that non-residents were also net sellers of money market paper, dumping $753 million in September, bringing the total reduction of Canadian
securities by foreign investors to $1.6 billion in the month.

However, non-residents bought another $453 million in September to bring the year-to-date inflow to $9.3 billion. “After a couple of quiet months, foreigners gobbled up $3.1 billion in new corporate issues during September, accounting for roughly two-thirds of total net increase in new bond issues,” says CIBC.

Meanwhile, Canadians were adding a net $1.7 billion to their portfolio of foreign securities in September, says CIBC. “Most of that reflected the purchase of US Treasuries, with activity in foreign stocks relatively muted. In the year-to-date, Canadians have picked up a net $6.3 billion of foreign bonds ‹ still on pace for a record one-year acquisition.”

Canadian investors were also selling stocks in September, reducing their holdings of foreign equities by $63 million, only the second month of net
sales in the past three years. “After averaging more than $2 billion per month from 1996-2001 – peaking in 2000 and 2001, after the foreign content limits on pension funds were boosted – net purchases of global equities by Canadians have begun to cool significantly in recent months,” says BMO.

“However, investment outflows continue to dog the Canadian dollar, as domestic investors are turning to foreign bonds, snapping up $1.8 billion worth in September. Purchases of global bonds by Canadians are on track to top the 1998 high of $7.1 billion.” CIBC says that these capital outflows remain the necessary counterweight to Canada1s healthy current account surplus. “A firmer tone in equity markets should be reflected in increased two-way flows for stocks in upcoming reports, but foreign holdings of Canadian equities will see a hit from BCE’s repurchase of Bell from SBC Communications.”