Scotiabank quantitative strategist Simone Arel highlighted renewed foreign interest in Canadian equities in a research report this week, noting that inflows for the past four months poured in at the fastest annualized pace since 2016.
This can only be viewed as a bullish sign for the domestic market, as global investors look to benefit from Canada’s plethora of cyclical stocks with their links to recovering global growth.
In the chart accompanying the research report (re-posted on social media here), the trailing 12-month net flow of investment into Canada has only just turned positive. Ms. Arel believes foreign investment will continue to climb for a multi-year period, similar to the period between November 2015 and the fourth quarter of 2017. Importantly, 2016 was the last time the TSX outperformed the S&P 500 on a calendar-year basis.
Trailing 12-month foreign investment in Canada bottomed at the end of October 2020. I took a look at the top-performing TSX stocks since that point. There is, of course, no guarantee that the best performing stocks were the ones foreign buyers were acquiring. We can assume a degree of correlation in many cases, however - at least in terms of sectors - because investment funds tend to gravitate towards industries with the most price momentum.
Energy stocks dominate the list of top performers from the end of October until now. Of the top 20 stocks, nine are oil and gas related - 10 if we include uranium producer Denison Mines. Crescent Point Energy Corp., Enerplus Corp., MEG Energy Corp., Vermilion Energy Inc., Whitecap Resources Inc., Turquoise Hill Resources Ltd., Cenovus Energy Inc. and Nexgen Energy Ltd. all more than doubled for the period.
Paper and forest company Interfor Corp was also among the best stocks to own, rising 118 per cent as homebuilding activity exploded on both sides of the border.
Again, I’m not suggesting that foreign buyers were responsible for the rallies in all these cases. But as long as the global economic recovery boosts oil demand and housing markets, and foreign buyers look to Canada for economically-sensitive stocks, there is a very good chance for these market sectors to outperform.
-- Scott Barlow, Globe and Mail market strategist
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