Foreign investors continued piling into Canadian debt securities in August, but they may have backed the wrong assets.
In August, foreign investors bought $26.3 billion worth of Canadian securities, primarily debt, according to the latest data from Statistics Canada. This marked the largest level of investment since the onset of the Covid-19 pandemic when government debt issuance soared in order to fund pandemic spending, StatsCan said.
In particular, investors added $12.6 billion in government bonds in August and $13.1 billion of corporate debt.
They also bought $3.3 billion worth of Canadian equities in the month, more than reversing the $1.2 billion in stocks that they sold in July.
A report from National Bank Financial Inc. said that, in July and August, foreign investors put a total $38.3 billion into Canadian debt securities, which may have been a mistake.
“Hindsight, as they say, is 20-20. But from the looks of things, some of these foreign investors may have bet on the wrong horse,” it said, as expectations for rate hikes in Canada have moved forward, causing Canadian bonds to underperform U.S. Treasuries since the summer.
At the same time, foreign investment in Canadian stocks has been relatively modest just as Canadian equities have been outperforming U.S. markets.
“Some foreign investors may be kicking themselves for failing to take on more Canadian equity exposure, as the S&P TSX has proceeded to outperform the S&P 500 of late,” NBF said, noting that the S&P TSX Composite Index was up about 1.8% since the end of August, whereas the S&P 500 Composite was down 1.0%.
“This is a trend we expect to continue, based on the superior performance recorded by Canadian stocks during earlier periods of elevated inflation,” it said.
StatsCan noted that Canadian investors also resumed their buying of foreign securities in August, adding $15.2 billion worth during the month, after selling $4.7 billion worth in July.
“The investment activity in August was almost equally attributable to foreign bonds and foreign equities,” StatsCan reported.
Canadian investors added $9.4 billion worth of U.S. stocks to their holdings once again in August — primarily large cap tech stocks — while continuing to sell non-U.S. foreign stocks. Canadian investors sold off $1.4 billion of other foreign equities in August, following a $1.6 billion divestment in July.
Alongside U.S. equities, Canadian investors also added $7.1 billion in foreign debt securities in August. Over the past seven months, investors have added $33.6 billion in foreign debt, StatsCan said.
Overall, international transactions in securities generated a net inflow of funds of $11.1 billion in the Canadian economy in August, following a net inflow of $18.7 billion in July.