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International investors have rediscovered an appetite for Canadian stocks, fuelling the sharpest spike in net foreign inflows into Canada in more than five years.

With signs of a postpandemic economic boom building by the day, a big shift toward economically sensitive sectors, such as natural resources and financials, is taking place across stock markets around the world.

Suddenly, Canada’s heavy weighting in banking and commodities has turned from a weakness to a strength.

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“This is more of a sector call than anything else,” said Greg Taylor, chief investment officer at Purpose Investments. “As a global expansion starts to take hold, it could be a nice setup for the Canadian market, and international investors are starting to notice.”

Canada’s appeal on the global stage is a function of the economic cycle. In periods of abundance, when demand for commodities is strong, foreign money tends to flow vigorously into TSX listings.

Leaner times see investors lose interest in Canadian stocks, which has broadly been the case since late 2014, when the entire commodity complex tipped into a downturn. The pandemic then saw inflows turn negative, as foreign investors became net sellers of Canadian stocks for the first time since the global financial crisis.

Foreign money flowing out of Canadian stocks totalled $11.2-billion in 2020, according to data recently released by Statistics Canada. That’s the highest annual outflow on record.

But the negativity toward Canada started to wane before the year was out. Inflows started to build through the fall and winter, culminating in a big month of December as international investors pumped $6.4-billion in net purchases into Canadian listings.

There is every reason to believe the trend has legs, said Martin Roberge, a portfolio strategist at Canaccord Genuity. It’s rare that foreign flows to Canada turn negative; it’s only happened eight times over roughly the past 35 years. Each time, inflows reverted powerfully the following year, with the S&P/TSX Composite Index posting an average return of 16.6 per cent.

“I need to assume foreign investors are not just dipping their toes,” Mr. Roberge said. “It’s probably going to be a sustained comeback for the whole year.”

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FOREIGN INVESTORS

RETURN TO CANADA

Net foreign flows into Canadian equities/

total Canadian market cap (%)

4%

3

2

1

0

-1

-2

1988

1992

1996

2000

2004

2008

2012

2016

2020

THE GLOBE AND MAIl

SOURCE: canaccord genuity

FOREIGN INVESTORS RETURN TO CANADA

Net foreign flows into Canadian equities/

Total Canadian market cap (%)

4%

3

2

1

0

-1

-2

1988

1992

1996

2000

2004

2008

2012

2016

2020

THE GLOBE AND MAIL, SOURCE: canaccord genuity

FOREIGN INVESTORS RETURN TO CANADA

Net foreign flows into Canadian equities/Total Canadian market cap (%)

4%

3

2

1

0

-1

-2

1988

1992

1996

2000

2004

2008

2012

2016

2020

THE GLOBE AND MAIL, SOURCE: canaccord genuity

Consider the commodity space, which has stormed back since bottoming out last April. Since then, the Bloomberg Commodity Index has risen by 45 per cent to its highest level since 2018.

“The recovery in oil and metal prices, and strength in base metal and forest product prices, are no doubt part of the revival in foreign interest,” Avery Shenfeld, chief economist at CIBC World Markets, said by e-mail.

Over the past week or so, the bull case for Canadian stocks has received a couple of additional pieces of confirming evidence.

Canadian GDP numbers released on Tuesday showed the economy growing at a 9.6-per-cent annualized pace in the fourth quarter. That’s considerably better than economists were anticipating, suggesting the economy weathered the second wave of COVID-19 infections much better than expected.

“Just a few short months ago, the conventional wisdom was that Canada’s economy would struggle to post any growth in Q4 amid the building second wave. Instead, the economy had one of the best performances in the world in the quarter,” Douglas Porter, chief economist at Bank of Montreal, said in a note.

As a result, BMO boosted its 2021 growth forecast by a full percentage point to 6 per cent, which would be the strongest pace of expansion in Canada in nearly 50 years.

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Also outpacing the forecasters were Canada’s banks, which wrapped up their first-quarter earnings season last week. The Big Six beat consensus estimates for earnings growth by a huge margin – 26 per cent, on average.

One common theme across the group of banks was mortgage loan growth, fuelled by Canada’s resilient housing markets.

“That’s a big wake-up call to global investors who really had been ignoring the banks and the Canadian economy,” Mr. Taylor said.

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