Chart of the Month – March 2019
Net Cash-Flows from Cross-Border Securities Trades
Canada generally benefits from foreigners purchasing Canadian debt and equity investments in greater quantities than Canadians investing outside of Canada. These flows are sizable and can often affect the value of the Canadian Dollar. As can be seen the larger component of these flows is the fixed income market which is to be expected since that market is much larger than the equity market but in terms of the impact to our investment portfolios the equity market flows are of greater interest.
As can be seen the inflows in years 2015 and 2016 were a significant improvement over prior years and the reason for this are not immediately apparent as one would have expected the drop in the oil price from $100 per barrel to approximately $30 per barrel. would have discouraged foreign investors from entering the Canadian market. It is possible that the drop in the value of the Canadian Dollar over that time may have attracted investors to some more robust sectors of the Canadian market, like the banks.
It is interesting to note that Central Banks play a large role in the cross-border movement of funds as Canadian investors moved heavily into foreign bonds in 2017 as the spread between Canadian and U.S. Government bonds widened in favour of U.S. Treasuries but as the Bank of Canada continued tightening in 2018 this flow dried up.
One of the most interesting points is that the amount Canadians invested in foreign equity markets during 2018 reached an all-time high. This was likely spurred by the U.S. tax cut which was largely expected to flow into the U.S. equity market, becoming a catalyst for the U.S. market to outperform the Canadian market. Given the surge in the flow to foreign equity markets in 2018, this is unlikely to be repeated in 2019 and is more likely to regress back to the mean or perhaps partially reverse.