The sell orders are piling up on Canada. From Bank of America Merrill Lynch and Fidelity Investments to exchange-traded funds, investors are betting against the country's currency, equities and even its once-vaunted bank stocks as oil collapses.
Traders yanked $874-million (U.S.) from all U.S.-based exchange-traded funds with a Canadian focus from Oct. 1 through Jan. 14. That's a 22-per-cent drop amid the plunge in oil, the country's biggest export, data compiled by Bloomberg show. The retreat from Canada puts it second in dollar terms to the U.K. for country-focused funds.
Bank of America is telling investors to take bearish bets against Canadian bank stocks in favour of U.S. regional lenders and the loonie's 2.8-per-cent slump this month to about 84 cent (U.S.) has already blasted past the average year-end target of a Bloomberg analysts' survey. The S&P/TSX composite index has dropped 7.2 per cent in the past six months, compared with a 1.7-per-cent gain for the S&P 500.
"We think the Canadian economy is at risk," Collin Crownover, State Street Global Advisors Inc.'s Boston-based head of currency management, said in a phone interview. Crownover said he's betting on continued weakness in the Canadian dollar. "I never really understood why Canada was considered a haven when the economy is so dependent on commodities."
The effects of oil's 55-per-cent plunge since June is beginning to ripple through Canada, the Group of Seven's biggest exporter of the commodity. The country's publicly traded energy companies have announced about $12-billion of capital spending cuts since November, according to data compiled by Bloomberg. That includes Suncor Energy Inc., which said yesterday it would eliminate 1,000 jobs. The spending and job cuts may push Alberta into a recession, according to the Conference Board of Canada.
The slump in oil is "on the whole" a negative for the economy, and prices could go lower, or remain low, for a significant period before the world adjusts to the recent surge in supply and slower global growth, Bank of Canada Deputy Governor Tim Lane said Wednesday. The central bank, which predicted in October the economy will expand by 2.4 per cent in 2015, will give a detailed outlook on Jan. 21.
Investors have already begun to ratchet back expectations for an interest rate rise this year, with futures trading pricing in a 1.3-per-cent chance of an increase, compared with 48 per cent at the beginning of January. David Wolf, co-manager of Fidelity Canadian Asset Allocation Fund and a former Bank of Canada adviser, says the next move on rates may be down.
Markets also see further declines for the loonie, which is trading near 83.5 cents (U.S.) and has dropped 8.4 per cent against its U.S. counterpart over the past year. Wagers against the currency outnumbered those for it – what's known as net shorts – by 17,087 positions as of Jan. 6, the most since Dec. 5, according to data from the Washington-based Commodity Futures Trading Commission.
For Merrill Lynch, the risk is the slowdown in the oil sands will seep into a housing market "already saddled with near-record levels of household leverage."
Canada's ratio of household debt to disposable income rose to a record 162.6 per cent between July and September, according to data released last month. Benchmark interest rates of 1 per cent have fanned a house-buying frenzy that sent 2014 sales up 6.7 per cent in Toronto and 16 per cent in Vancouver.
"Given the high cost of production of Canadian oil sands, unless you think oil is going back to $70 or $80 a barrel they'll suffer and we think that'll have collateral damage to the financial sector in Canada," Brian Leung, global equity strategist at Merrill Lynch, said by phone from New York Jan. 12.
Leung and Chief Investment Strategist Michael Hartnett advised shorting Canadian banks as one of their 15 trade ideas of 2015 and forecast the real estate market in Detroit, which is emerging from the U.S. auto collapse, will outperform Calgary. Canada's oil hub is already showing signs of real estate stress. Resale home prices in the city fell 1.1 per cent in December from November, the biggest drop in almost two years.
Canadian banks aren't used to being in the position of being shorted. The Geneva-based World Economic Forum named the country's banks the world's soundest lenders for seven straight years after they sidestepped the worst of the 2008-09 credit crisis.
Uncertainty about Canadians' ability to keep stoking consumer spending is already beginning to take its toll on bank stocks. After reaching a record in September, the S&P/TSX composite commercial banks index has dropped 5.9 per cent over the past three months while the KBW Bank Index of 24 U.S. lenders has slipped 1.5 per cent. In the bond market, the advantage Canadian banks enjoyed over peers almost without interruption since the financial crisis in 2008 has disappeared, as bond yields converge with the global average.
"The financial sector has been benefiting from a strong real estate market up until now," Youssef Zohny, portfolio manager at StennerZohny Investment Partners of Richardson GMP Ltd., said by phone from Vancouver on Jan. 12. Richardson GMP manages about $29.3-billion (Canadian). "But going forward there are some signs: household debt in Canada, obviously the oil price being cut in half. These things could have some effects on bank earnings."
Investors are still enamoured with at least one major Canadian asset class – bonds. The yield on the 10-year benchmark government bond hit a record low of 1.516 Thursday, breaching a nadir on July, 2012 as investors bid up prices amid a global flight to quality. Canadian bond returns have outpaced global peers since Oct. 1, gaining 3.8 per cent compared with an overall 3 per cent advance in Bank of America Merrill Lynch's Global Broad Market Index.
The drop in oil prices should give consumers more money to spend elsewhere while the lower currency will boost Canadian exports to the U.S., where growth is revving up.
Wolf at Fidelity is looking for higher returns south of the border.
"Better investment performance can be expected from moving out of Canadian assets into U.S. equities in particular," he said in a Jan. 7 outlook, repeating advice he offered last year.
Jonathan Lemco, senior sovereign debt analyst at Vanguard Group Inc., the world's biggest mutual-fund company, said Canada remains an important part of his funds as a risk diversification, but he prefers markets in Chile, Poland and Korea.
"Canada is a big commodity producer, oil is a big part of that, China and other countries are buying a little less," he said. "It will take a bit of a hit."