In June, Canada experienced an exodus of $8.3 billion as foreign interest waned and Canadians sought investments abroad. It’s not exactly an encouraging sign for the country, as reported by Statistics Canada.
Foreign investors managed to put $709 million into Canadian securities, marking their first investment since January. While that might seem like a silver lining, economist Warren Lovely from the National Bank of Canada suggests this is merely a small victory in a larger struggle.
This minor investment only reversed a fraction of the sell-off that has happened over the year. Lovely pointed out in a recent memo that, despite a return of some foreign funds, many foreign investors remain uncertain about Canada’s market. He noted, “The first half of the year has not seen such lackluster foreign profits.”
Foreign purchases of Canadian bonds came in at $6.9 billion, a reduction from the $9.7 billion seen in previous months. Most of these purchases were in corporate bonds, though foreign holdings of federal bonds have actually dipped by $1.3 billion.
However, when it comes to stocks, foreign investors sold off significantly, dropping their Canadian stock exposure by about $3 billion in June after an $11.5 billion decrease in May. Much of this sell-off targeted the banking and transportation sectors.
On the flip side, Canadians bought a notable $9 billion in foreign securities, resulting in an overall $8.3 billion outflow from the Canadian economy for the month. Over the second quarter, the total outflow reached $43.7 billion, echoing a similar trend from the first quarter.
Lovely remarked that the country is facing substantial capital outflows as non-residents acquire foreign assets while Canadians do the same. This trend of outflow has reached a level that is quite unusual for the country’s economic climate.
Given the increasing federal borrowing requirements, Lovely emphasized the necessity for close monitoring of the Canadian bond market. In 2024, nearly 75% of newly issued government debt was purchased by foreign investors, but that figure has sharply declined in the first half of this year.
Domestic investors have picked up the slack, absorbing about $100 billion of government-issued bonds. This represents 6% of GDP, not taking into account additional funding needs from non-central governments or private companies.
Lovely warned that the persistent reluctance of foreign investors could present significant problems if it continues. He suggested that Canada’s government needs to provide clear budgets and timely trade agreements to avert unfavorable outcomes.
