Pandemic-exhausted Canadian investors flocked to foreign stocks in 2021. In 2022, they reclaimed most of them.
According to Statistics Canada’s latest tally, Canadians divested from foreign stocks to the tune of $2.3 billion in August, leading to a seventh month of divestment in 2022.
From January 1 to the end of August, StatsCan says, Canadian investors sold $57.6 billion in foreign stocks compared to a total investment of $71.2 billion during the same period in 2021.
The massive influx of foreign investment has been carried out by Canadian companies, governments, and large institutional investors, but also includes individual retail investors either directly, through mutual funds or exchange-traded funds (ETFs), or through company pensions.
What does a year happen?
The stark difference in the global market climate between 2021 and 2022 helps explain this change. Russia’s invasion of Ukraine in February and subsequent cuts in energy supplies to most of Europe led to an influx of money from the continent to commodity-rich countries such as Canada.
As emerging markets continue to falter, US stocks (which account for just over half of total August outflows) have seen a reversal in wealth. So far this year, the benchmark S&P 500 index is down 22.3 percent as of 10 a.m. Friday, compared with a 27 percent rise in 2021.
Most of the purchases in 2021, according to Statistics Canada, targeted big tech companies such as Apple, Microsoft, Google and Facebook, which are leading the decline this year.
BIAS’ house still haunts Canada’s retirement wallets
The reversal reinforces fears that most Canadians are keeping much of their retirement savings in Canada.
Canadian investment portfolios are known to be associated with household bias. This means that investment savings tend to skew heavily toward publicly traded Canadian stocks despite the fact that they account for less than three percent of global stocks.
Of those three percent, nearly two-thirds are directly related to financial resources or sectors, which could be devastating to retirement savings if one of these sectors falters.
Global diversification can hedge this type of risk and expose an investment portfolio to a much wider world of opportunities in sectors and geographies within the remaining 97 percent of the global stock market.
How much to set aside from any portfolio outside of Canada depends on the circumstances of the individual investor, and a qualified advisor is sure to be able to help.
Currency fluctuations could make things worse
The seismic shift in the global currency market between 2021 and 2022 also plays a role in the reversal of the influx of foreign stocks, for better or worse.
Within a year, the Canadian dollar fell from about 80 US cents to less than 73 cents. This means that Canadians who bought US stocks at their peak last year could cut their losses when they went crazy if they sold at this year’s lows.
However, the Canadian dollar has appreciated against other global currencies on the back of an incredibly strong US dollar. This would add to losses when selling offshore investments and switching to Canadian dollars.
Currencies are a lesser factor for Canadians who have taken advantage of the strong Canadian dollar to bolster their US-denominated accounts in Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA) to buy foreign stocks in US dollars.
Most Canadian trading accounts have easy access to directly purchase US-listed stocks, which can also provide exposure to the rest of the world since the US dollar is the global standard. Roughly 50 percent of all publicly traded companies in the world are located in the United States and many operate globally. This not only gives US corporate investors global reach, but it also places the burden of hedging on all other foreign currencies on behalf of shareholders.
Originally published at San Jose News Bulletin
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