Skip to main content

Top TSX-tracking ETF has biggest 2017 outflow as potential rate hike nears

A Toronto Stock Exchange (TSX) logo is seen in Toronto November 9, 2007.

Mark Blinch/Reuters

Investors appear to be fleeing Canadian shares before the first potential interest-rate increase in seven years.

Traders withdrew $358.1-million ($278-million) last week from the iShares S&P/TSX 60 Index ETF, the biggest exchange traded fund tracking Canada's benchmark index. The outflow was the largest since early December, when investors were pouring into U.S. stocks following the election of President Donald Trump. Another $20.2-million was withdrawn on Monday.

Canadian equities are the second-worst performers among developed markets this year, battered by a drop in commodity prices and a looming slowdown in housing. The lag however downplays the strength of the economy, which has been growing the fastest among peers, setting the stage for the Bank of Canada to tighten rates on Wednesday.

Story continues below advertisement

"Our market is unloved by global investors," Steve Belisle, senior portfolio manager at Manulife Asset Management, said by phone from Montreal. The drop in some sectors is unjustified and presents a buying opportunity, he added.

Belisle recommends buying electricity producers like Boralex Inc. and pipelines like Enbridge Inc. Even though both are rate-sensitive stocks, the market has already priced in the possibility of a hike and they are cheap relative to their global counterparts, he said.

Expectations for an increase in borrowing costs has surged to 94 per cent from 5 per cent a month earlier, based on overnight index swaps data compiled by Bloomberg. Governor Stephen Poloz will raise the benchmark rate to 0.75 per cent on Wednesday from 0.50 per cent, according to 22 of 31 economists in a Bloomberg survey, while the rest see no change. Finance Minister Bill Morneau on Monday declined to comment on the decision, but said the economy is "firing on all cylinders."

Life insurance companies have outperformed the broader market since the central bank last month first signaled its willingness to raise rates, while rate-sensitive sectors like utilities, telecoms, REITs and consumer stocks have underperformed. The S&P/TSX Composite Index is down 2.1 per cent in the same period.

A review of equity performance following Bank of Canada tightening cycles over the past dozen years shows that materials stocks tend to significantly outperform all other sectors of the Canadian market in the three months following a rate hike.

Rob Carrick has a warning about average yearly prince inflation for Canadians.
Report an error
Tickers mentioned in this story
Unchecking box will stop auto data updates
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

If your comment doesn't appear immediately it has been sent to a member of our moderation team for review

Read our community guidelines here

Discussion loading…

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.