Patriotism sure, just not for portfolios: NBF

Canadian consumers may have been shunning U.S. products and travel since the new U.S. administration sparked cross-border conflict, but investors are proving that they aren’t nearly as patriotic. According to National Bank Financial Inc. (NBF), domestic investors continue to snap up U.S. securities.

In a report Monday, NBF economists noted that Canadian investors have been eagerly adding U.S. financial assets to their portfolios since the start of the year.

“The idea of ‘buying local’ has resonated with many Canadians since the U.S. threw our longstanding, mutually beneficial bilateral relationship into doubt,” it said. “But this ‘Buy Canadian’ bias hasn’t really shown up where it arguably matters most: in portfolio investment flows.”

Citing data from Statistics Canada, the report said most of the buying activity has come in U.S. equities, but that domestic investors have also added to their holdings of U.S. corporate and government debt too.

“Canadians have even helped finance Uncle Sam’s wholly unsustainable budget deficit; not exactly the tough message to the American administration some might have advocated,” the report said.

Moreover, foreign investors have been shedding Canadian assets — primarily equities — even as “Canadian stocks have generally outperformed the U.S., based on benchmark equity indices,” it noted.

Looking ahead, NBF maintains a slight overweight position in Canadian equities (it recommends a 21% weighting vs. a benchmark weight of 20%), and a more decisive underweight for U.S. stocks (15% vs. a 20% benchmark weight).

In a separate report, NBF cautioned that U.S. equity valuations are elevated and could come under pressure as economic growth weakens, threatening margins and earnings, which could “trigger a reassessment of valuations.”

Additionally, foreign investors could turn away from U.S. markets if concerns about inflation, interest rates and the independence and credibility of the Fed continue to arise.

“A decline in foreign participation could reduce demand for U.S. financial assets, potentially leading to higher funding costs, increased market volatility, and further downward pressure on the U.S. dollar, with broader implications for financial stability and capital flows,” it said.

At the same time, NBF is also expecting some strength in the Canadian dollar in the months ahead as the federal government pursues an ambitious effort to kickstart domestic investment.

“So politics aside, and contrary to year-to-date portfolio capital flows, a ‘Buy Canadian’ investment strategy looks sensible to us,” the report said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.