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Foreign capital inflows growing

Canada has always been an inconsequential portion of the world economy – the “boring American cousins”. Early in 2009 the American TIC data started showing a trend: Americans investing in Canadian securities was growing.  This American trend is expanding with global investors investing “heavily” in Canada.  

Statistics Canada released data showing the growing inflow of money into Canada, equivalent to 7.6% of our GDP.  Net foreign purchases of long-term securities (bonds and equities) rose to $23.7 billion in May 2010. Over the past 12 months total foreign direct investment into Canada totaled $121 billion. 

 
(Statcan data via global Insight)

Continuing a global trend ¾ of all these inflows have been into bonds:  first and foremost, Federal government followed by corporate bonds and then provincial bonds.
 
(Statcan data via global Insight)

What makes Canada such an attractive investment destination?

Canada got the deficit religion early; in the mid 90s, the Federal government undertook massive cost control programs, slashing budgets and expenditures.  At the time global economic growth was around 6% per annum.  Now that “Deficits matter”, Canada’s early action is admired and as the only G8 country that will see a reduction of sovereign debt from 86% in 2008 to 76% in 2014 is looking like a heaven of fortitude.

The Bank of Canada recognized that a stronger economy can sustain higher interest rates – and today (20th July) increased (for the second time this year) base interest rates by another 0.25%.  Inflation pressures appear to be under control, the Canadian dollar appears to be trading around its far value of 0.92 to the U.S. dollar.  Some economists see Canadian interest rate rising by another 1.25% by the end of 2011, and near 2.5% by the end of 2015.  Although, the Bank of Canada’s GDP growth forecast of 2.9% and 2.1% in 2011 and 2012 may temper that trend.

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