Monday, September 19, 2011

Foreigners Buying Canada Again

The short break where foreigners decided that Canada was not worth the effort was, it appears a one month phenomenon.  They’re back and the figure is $11.3 billion for July, mostly in sovereign short term instruments.  My guess is that foreign investors still see a strong likelihood that Canadian interest will rise (they will not) based on Canada’s overall economics health (forgetting Canada’s Q2/2011 negative GDP numbers).  Over the past 12 months, foreigners have purchase nearly $120 billion in Canadian assets, a similar level to what was seen in 2010 – and about 8% of Canada GDP.
Foreign portfolio investment in Canadian securities
(Source: StatsCan)

At the same time, Canadians are reducing their foreign bond holdings – not entirely surprising considering that when Canadian invest “abroad” we mean U.S.A. and the 10 year T-Bond are now down to 2% -- taking in consideration the movement in the CAD and the weak yield, there’s not much incentive for Canadians to hold foreign bonds, moreover Canadian are very concerned about foreign financial institutions – sub debt for American banks pays nearly 400 bps than the equivalent instrument for a Canadian bank…

Canadian portfolio investment in foreign securities
(Source: StatsCan)

Again 8% of GDP is a substantial amount of money, what must be worrying to the BoC is that most of these funds are in self liquidating short term instruments.  Not entirely certain what to make of this.  It could be a fear of capital control (or some other action by the Canadian authorities) to slow down the flow of hot money.  


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