Oct 21, 2022
Canadian investors retreat from foreign equity buying binge
By Dale Jackson
Look towards pipelines to benefit from long-term energy exposure: David McAlvany
VIDEO SIGN OUT
According to the latest tally from Statistics Canada, Canadians cashed out of foreign equities to the tune of $2.3 billion in August, resulting in a seventh month of divestment in 2022.
StatsCan says from Jan. 1 to the end of August, Canadian investors sold $57.6 billion in foreign shares compared with a total investment of $71.2 billion over the same period in 2021.
The massive outflow of foreign investments were made by Canadian businesses, governments and big institutional investors, but also include individual retail investors either directly, through mutual funds or exchange traded funds (ETFs), or through company pensions.
WHAT A DIFFERENCE A YEAR MAKES
The stark difference in the global market climate between 2021 and 2022 helps explain the about-face. Russia’s invasion of Ukraine in February and subsequent energy supply cuts to most of Europe has money flowing out of the continent into commodity-rich countries like Canada.
As emerging markets continue to flounder, U.S. equities (which account for just over half of the total outflows in August) have had a reversal of fortune. So far this year, the benchmark S&P 500 is down 22.3 per cent as of 10 a.m. Friday compare with a 27 per cent rally in 2021.
Most of the buying in 2021, according to Statistics Canada, targeted high-flying large technology companies such as Apple, Microsoft, Google and Facebook, which are leading this year’s downturn.
HOME BIAS STILL HAUNTS CANADIAN RETIREMENT PORTFOLIOS
The reversal reinforces concerns most Canadians are holding too much of their retirement savings in Canada.
Canadian investment portfolios are notoriously tethered to a home bias. That means investment savings tend to be heavily skewed toward Canadian publicly traded equities despite the fact that they account for less than three per cent of global equities.
Of that three per cent, roughly two-thirds are directly tied to the resource or financial sectors, which could be devastating to retirement savings if one of those sectors falters.
Global diversification can hedge that sort of risk and expose an investment portfolio to a much wider world of opportunities in sectors and geographic regions within the remaining 97 per cent of the global equity market.
How much of any portfolio should be allocated outside Canada depends on the circumstances of the individual investor, and a qualified advisor could certainly help out.
CURRENCY FLUCTUATIONS COULD MAKE MATTERS WORSE
A seismic shift in the global currency market between 2021 and 2022 is also playing into the foreign equity flow reversal, for better or worse.
In the course of one year, the Canadian dollar has fallen from near 80 cents U.S., to under 73 cents. That means Canadians who bought U.S. equities at their peak last year could have their losses tempered when converted to loonies if they sold at this year’s lows.
However, the Canadian dollar has gained in value against other global currencies on the back of an incredibly robust U.S. dollar. That would add to losses when selling out of overseas investments and converting to Canadian dollars.
Currencies are less of a factor for Canadians who took advantage of the strong loonie to beef up their U.S. denominated accounts in their registered retirement savings plans (RRSP) and tax free savings accounts (TFSA) to purchase foreign equities in U.S. dollars.
Most Canadian trading accounts have easy access to buying U.S. listed stocks directly, which can also provide exposure to the rest of the world since the U.S. dollar is the global standard. Roughly, 50 per cent of all publicly traded companies in the world are based in the United States and many operate on a global level. That not only gives investors in U.S. companies a global reach, but it also puts the onus on the company to hedge all other foreign currencies on behalf of shareholders.
