Foreigners opt for Canadian bonds, sell stock: StatsCan

Foreign investors continued to sell off Canadian equities in November, although the outflows were nowhere near those seen in October, according to Statistics Canada’s monthly report on international transactions in securities.

Non-residents reduced their holdings of Canadian equities by a hefty $9.5 billion in November, although these outflows were partially offset by net purchases of Canadian bonds, totalling $4.8 billion. This reduced the net outflows of Canadian securities to $4.8 billion.

The sell-off in Canadian equities should not be mistaken for foreign disdain for Canadian companies, according to Robert Kavcic, an economic analyst with BMO Economics. Foreigners continue to purchase Canadian stock, but have seen a large proportion of the Canadian holdings retired, due to October’s notable takeover activity which extended into November. The result was $6.1 billion worth of Canadian shares were retired over the month.

“With one more month of data to come, foreign investors have sold $34.8 billion of Canadian securities in 2007, a figure that would be positive excluding the $44 billion in M&A-related share cancellations,” he says.

Possibly motivated by global uncertainty, foreign investors opted for government issued bonds. Over two-thirds ($3.3 billion) of foreign bond purchases were in federal government bonds, largely outstanding instruments maturing within the next two years. StatsCan noted the interest rate differential between Canada and the United States has widened substantially to reach a two-year high, favouring investment in Canada.

Foreign investment in provincial government bonds rebounded as well. Non-residents bought $297 million, despite no new provincial government bonds placed in foreign markets for six consecutive months. StatsCan says foreign interest in private corporate bonds was flat.

The behaviour of Canadian investors was almost the complete opposite of non-residents; they sold foreign bonds, and bought foreign stock.

Canadians sold a record $4.8 billion worth of foreign bonds in November. StatsCan says residents resumed heavy divestment of U.S. government bonds, selling a record $3.2 billion in November. In addition, residents disposed of $1.2 billion of non-U.S. foreign bonds over the month, with $949 million worth being in Canadian dollar-denominated maple bonds.

StatsCan notes Canadians have acquired foreign stocks non-stop since October 2006, and purchased another $717 million worth in November. Interestingly, despite a the decline in U.S. stock prices in November, Canadians added $1.2 billion worth of American stocks over the month, with U.S. bank shares being the most popular category.

This trend points to bargain hunting, since share prices of this sector fell an average 10% during the month and over 26% since January 2007, as measured by the Standard and Poor’s Composite Index, StatsCan notes.

Kavcic says the trend of buying U.S. stocks has to be viewed in the longer context of an ongoing trend of Canadians increasing their U.S. holdings since the federal government removed the foreign content holding restrictions on RRSPs.

“Through the first eleven months of the year, Canadians have bought $24.5 billion of foreign equities, down fractionally from the prior year’s large outflow. Still, Canadians appear to be still taking advantage of zero foreign content restrictions on their RRSPs by investing abroad,” he says.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com