Canada's growing popularity with foreign investors has "staying power"

Friday July 16, 2010
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Canada's out performance versus many advanced economies is creating "staying power" for the country's growing popularity with foreign investors, according to a new report from CIBC World Markets Inc. "Canada is increasingly on the lips and minds of international investors," says Warren Lovely, government strategist with CIBC's macro strategy group, fresh back from meetings with investors across the U.S. and Asia. In CIBC's latest Global Positioning Strategy report, Lovely identifies a growing list of "strategic advantages" that are boosting interest in Canada and its weighting in global investment portfolios. Central to Canada's strong story is its fiscal advantage, says Lovely. He points first to Canada's much smaller need for fiscal adjustments to stabilize debt ratios. "Canada's provinces are not feeling the same heat as some U.S. states, are less prone to severe program cuts or increased revenue measures, and are therefore putting their regional economies at less risk," he says. In addition, the revenue picture for Canada's federal and provincial governments is also "brightening materially" with $15 billion in extra revenue projected for the year. Lovely says the fiscal improvement will serve to reduce borrowing requirements and protect federal and provincial credit ratings. It also means less bond issuance from Ottawa, which will "leave plenty of room in the long end for provincial and corporate issuers." Lovely also sees some challenges to Canada's continuing out performance. He notes that three quarters of Canada's exports go south of the border, meaning a "U.S. slowdown will leave its mark on Canada." He continues: "Canadian and U.S. real GDP growth has never been more tightly correlated than during the past five years. So the end of an American inventory rebuilding process will sap demand for Canadian wares." Other risks to Canada's economic prospects include the impact of a continuing strong Canadian dollar on manufacturing, an overheated housing market and a highly indebted household sector. "Notwithstanding these challenges, Canadian governments are courting international investors from a position of strength, hardly beholden to foreign capital, but happy to take full advantage of a healthy appetite for Canadian fixed income product," says Lovely. "The message is getting through, and there's every reason to believe that today's strong foreign investor interest in Canada will have staying power."

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