Safety first: Foreign investors bond with Canada

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DAVID PARKINSON | Columnist profile | E-mail

From Saturday's Globe and Mail

Published Friday, Jul. 22, 2011 5:20PM EDT

Last updated Friday, Jul. 22, 2011 5:44PM EDT

Canadian investors have long been accused of being homers. As the rest of the world has been telling us lately, that might not be such a bad thing.

Despite the elimination of foreign-content restrictions on registered retirement savings plans six years ago, most Canadians still keep the vast bulk of their investments in domestic securities. A recent study showed that even the country’s wealthiest investors – those with more than $250,000 to invest – average only 15 per cent of their portfolios in overseas holdings.

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But while investing experts have been telling us for years that we should be looking beyond Canada, data this week from Statistics Canada highlighted that foreign investors have increasingly been flocking to Canada. Foreign buyers snapped up a net $15.4-billion of Canadian securities in May, adding to a year that is shaping up as another big one for foreign buying of Canada’s stock and bond markets.

Seeing as most of us – for better or worse – have most of our money in the Canadian market anyway, it might be worthwhile taking a closer look at what those investing tourists in our country have been buying.

Destination of choice

Warren Lovely, head of macro strategy at CIBC World Markets, broke down Statscan’s data in a report this week to get a better sense of where the foreign money has been flowing.

While equity purchases are up significantly for the year to date, bonds have increasingly replaced equities as the destination of choice for foreign buyers – punctuated by a big surge in bond buying in May, particularly in federal government and federal Crown corporation bonds.

The impetus may be the deterioration of the government debt situation in Europe and the United States, which has fuelled a flight to safe, high-quality bond markets such as Canada. At the same time, it has convinced investors to step back from so-called “risk assets,” such as equities. Canada is being perceived as a low-risk market in risky times, and government bonds are the lowest-risk option for investors.

Crowning your portfolio

One particularly interesting trend has been the sharp gains in buying of bonds issued by federal Crown corporations. Mr. Lovely said that as big foreign buyers such as central banks have become more comfortable with Canada, they have begun to move past the federal government debt to buy high-quality Crown issues such as Canada Mortgage Bonds – which carry the same top-notch credit rating but offer higher interest rates.

“It’s yield enhancement without erosion in credit quality,” he said – adding that this same logic makes sense for smaller retail investors, too.

“There is a very strong argument that this could be a diversification tool for investors of all stripes.”

• Foreign investors buy up Canadian securities (theglobeandmail.com)
• Foreigners back to buying Canadian bonds (business.financialpost.com)
• Foreigners Go Crazy For Canadian Bonds (businessinsider.com)
• Ignorance has been bliss for wealthy investors (opinion.financialpost.com)
• Go west to find Canada's savviest investors (opinion.financialpost.com)
• Foreigners leap into Canadian assets (business.financialpost.com)
• Funds: Investors Took a Lot of Cash Out of Stock Funds in June (blogs.wsj.com)
• Foreigners invested $6.3B in Canada in March (cbc.ca)
• Foreigners buy up Canadian stocks and bonds (cbc.ca)
• Investors pull out of high-yield bond funds (theglobeandmail.com)

G20: Why we all want to be Canadian now

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Even on a rainy weekday at Ottawa's By Ward market, Canadian shoppers are cheery.

As Americans and Europeans face deficits and drastic government cuts, Canada's economy is recovering from only a mild recession.
Sheltering near the maple syrup stall, local restaurant promoter Melissa Grecco says Canada escaped the fate of the US.
"We felt the effects on corporate bookings, companies not spending money on staff or booking on a limited budget. But we didn't feel it as much as the US. And within the last couple of months our business has exploded."
Painful reforms

Pierrre de Varennes Real estate broker, Ottawa

So Canada is now one of the top performing industrialised economies. How did they manage it?
For a start, painful reforms in the 1980s and early 1990s.
Canada's government, based in the stone neo-gothic Parliament building in Ottawa, along with individual provinces, were able to afford an economic stimulus package.
Whilst other nations borrowed, Canada had a budget surplus for over a decade.
According to James Flaherty, Canada's jaunty finance minister, it was also down to a more cautious approach.
"The Canadian character is relatively fiscally conservative. Canadians themselves are relatively prudent, I think, in terms of how much they are prepared to borrow and the risks they are prepared to take."
Safe as houses Certainly, fewer risks are allowed in the housing market.

Julie Dickson Banking superintendent Europe told to 'focus on growth'

Canadian home values have held fairly steady according to Pierre de Varennes, a real estate broker in Ottawa, with 350 employees.
He says stricter standards for homebuyers meant no housing boom and bust in Canada:
"In Canada, you cannot over-mortgage your property. In fact if you are financing more than 75% of the value, you have to get insurance. Not for you but for the bank."
With that protection, Canadian banks have done well from mortgages. And with less exposure to toxic sub-prime mortgages in the US, Canada's six biggest financial institutions, headquartered on Bay Street in Toronto, survived the financial crisis disaster free.
'Big stick' The Toronto skyline that Gordon Nixon, the President of Royal Bank of Canada, can see from his office on Bay Street not only looks very different to Manhattan. It is run differently, too.
"The structure of our marketplace in Canada is very different," he says.
"Most mortgages are held on the balance sheet of banks. The terms are more conservative and there is not as aggressive a marketplace.

"Sub-prime lending is very limited in the Canadian marketplace. What was the weakest asset class in the US and spread to the balance sheets of many banks was one of the strongest in Canada."
But Canada has also been happy to wield a bigger stick when it comes to financial regulation.
Banking superintendent Julie Dickson credits Canadian firms with better risk management.
But banks must also adhere to more stringent standards. What's more, her office is within walking distance.
"We spent a lot of time looking at what they are doing on a day-to-day basis. We also had good rules when it comes to capital and leverage. And the industry is of a size that it is easier for the regulator to get their arms around it."
Canada's financial sector is smaller and perhaps more insulated than in the US.
Critics add that Canadian banks are less innovative, with higher costs for consumers. Talking to Canadians, they seem to shrug off those arguments, happy with the results of a more prudent and, some argue, less greedy economic philosophy.
Puzzle solved  John Criswick says being in Canada has helped his business The G8 and G20 is a crucial opportunity for Canadian policy makers, eager to vaunt their successes to leaders gathered in Toronto.
And Canada need only point to growing businesses like Magmic. The Canadian IT firm makes games for the Blackberry, Apple's iPhone and iPad.
John Criswick, who founded in the firm in 2002, says the recession was painful but the odds have been tipped in his favour because he is in Canada.
"The recession definitely had an impact on us. We are half the size we used to be. But we are growing out of that and being in Canada has aided us in that recovery. It is pushing us beyond what our competition are doing in the US."
John's most profitable game? The iconic US brand the New York Times Crossword - currently the top selling gaming app on the iPhone.
The Canadians, it seems, have answers for even the toughest puzzles and they are keen to share their strategies with the rest of the world. Why in this economy, we all want to be Canadian.

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