It turns out that foreign investors' love affair with Canada is more than a fling. It's evolving into a long-term, committed relationship.
A move into Canadian stocks and bonds that began last year is part of a permanent shift in the way foreigners see the country, Warren Lovely, government strategist at CIBC World Markets Inc. in Toronto, concluded in a report released Wednesday.
Just back from nearly a month of chatting up investors across Asia and the United States, Mr. Lovely said foreign central banks and sovereign wealth funds are putting more of their cash here, drawn by the country's solid economic growth, healthy fiscal conditions, limited exposure to Europe and still-growing population. And as they look to diversify, many are putting money directly into Canada for the first time.
"Those we've talked to are getting religion on Canada's potential outperformance versus a growing list of advanced economies," Mr. Lovely said. "It's hard to recall a time when the country possessed such relative, if not absolute, strength."
Think of Canada as the Un-American North American play or the non-Eurowealthy economy.
The foreign attraction is most pronounced in net purchases of government and corporate bonds, which hit a record 12-month rolling total of $95-billion in April. Net purchases are likely to slip a little amid May's market turmoil, Mr. Lovely suggested, but they remain firmly on a pace to set a new high for the year.
"The country is getting itself more and more on the radar screen of foreign investors," he said in an interview.
That may be, but old perceptions are often tough to shed. Mike Lenhoff, chief investment strategist at British investment manager Brewin Dolphin in London, acknowledged that Canada has a compelling story to tell right now, including a strong currency and better fiscal health than most of its peers.
Yet when portfolio managers think of Canada, they often think of it mainly as a resource supplier to the United States.
"Our own portfolio managers, when they think of the global scene, they don't focus much on Canada, probably unfairly," Mr. Lenhoff said. "When they think of Canada, they think of its resource base. And there's a lot more to Canada than its gold shares and energy companies."
Canada has long benefited from its proximity to the United States and its deep economic integration with its southern neighbour. But with the U.S. recovery slowing and that country facing swelling deficits, those advantages are fading, at least for now.
Mr. Lovely acknowledged Canada can't change its geography or centuries of history. That means that the sluggish U.S. recovery and steep federal debt burden will "leave its mark on Canada," he said.
"They'll always be our largest trading partner," he added. "But we're diversifying."
Roughly three-quarters of Canada's exports are shipped to the United States, down from nearly 90 per cent a decade ago as exports grow to countries such as China, India and Brazil.
That increasing trade diversification will help Canada's economy grow more quickly than that of the United States for the next few years.
But Canada has other distinguishing features that set it apart, including an improving fiscal position. Mr. Lovely said Ottawa and the provinces are poised to rake in $15-billion more than expected in the 2010-2011 fiscal year. That means less painful spending cuts and the potential for some tax relief. He said Ottawa and least two provinces - Ontario and British Columbia - are likely to lower their deficit forecasts in the next few months.
The United States, on the other hand, is headed into an era of higher taxes and reduced government spending.
Net foreign purchases of Canadian bonds
April 2009: $18-billion
January 2010: $88-billion
Sources: CIBC, Statistics CanadaReport Typo/Error