Domestic investors were skeptical when a major investment bank advised clients to short-sell Canadian bank shares and using the proceeds to buy U.S. banks. Nonetheless, the idea was remarkably lucrative. A look at the numbers will tell us why, and whether the trend is sustainable.
Michael Hartnett, Chief Global Equity Strategist at Merrill Lynch, first recommended the trade to sell Canadian financials and buy U.S. in early 2013. The reasoning had nothing to do with financial health – Canadian bank balance sheets remain far stronger than their U.S. counterparts – and everything to do with the fact that the two countries are at much different stages of the economic cycle.