Investors moving out of Canada?

A new survey from Horizons ETFs found investors and advisors are looking elsewhere for opportunity, namely in U.S. equities and gold - we sat down with Mark Noble to learn why

Ruth Saldanha 23 August, 2019 | 1:50AM
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Ruth Saldanha: Horizon ETFs' latest survey shows that with increasing fear of slowing global growth, investors and advisors are moving into gold and U.S. equities, and away from Canada. Mark Noble, Vice President of ETFs Strategy at Horizons, is here with us to talk about the survey and what he expects for the rest of 2019.

Mark, thank you for being here today.

Mark Noble: Always a pleasure.

Saldanha: So, why do investors and advisors not really like Canada right now?

Noble: Well, we've seen actually pretty high levels of bullishness on Canada going into sort of Q4 of 2018. We do this advisor sentiment survey on a quarterly basis. We survey about 200 advisors. But we've seen a big shift away from Canada in terms of preference. This last quarterly survey, which completed on June 30th, show that only about 40% of advisors were bullish on Canada.

In some ways, I think there's some good things here. The good thing is that I think there's a tacit recognition by advisors and investors that Canada is a very sector concentrated economy and even more so when we look at the equity marketplace. So, you're looking at almost 50%, over 40% in financials, and then you're looking at a heavy weighting to energy and the two together make up more than half the market cap of our stock market. And those are not two sectors that they're bullish on. So, there's been a movement away from a view that the energy sector doesn't seem to be running up anytime soon. Oil prices are probably in sort of the $45 to $55 range for quite some time, unless there's some sort of macro global economic event on supply. And banks have had a pretty good run and their earnings are sort of going along the way, and you've got an economic environment where there's deflationary pressure not only globally from trade, but also just interest rates, job growth is starting to slow, economic growth has gone from about 3% to a little bit around 2%. So, all this doesn't really make Canada that attractive.

So, what you cite is a big shift, where advisors are favoring U.S. equities, which by and large, have a massive amount of technology exposure and huge bullish sentiment, over 60%, for gold. And gold has really come into favor for the first time in probably more than a decade, and this is due again to a view that we've now pivoted over the last six months for an environment where we were concerned about inflation and rising interest rates, and we've now moved to an environment where we're now looking at global interest rate cuts, negative interest rates, a decline in the U.S. dollar. Gold is viewed as a store of value, and therefore, there's been a lot of interest in gold and gold equities, which have been undervalued for so long, are starting to see huge leverage on their earnings from the rising gold prices. And so, those have been heavily in favor.

Saldanha: So, do you expect this interest to continue for the rest of the year? Where do you see the most interest for the rest of 2019?

Noble: Well, it's interesting, I always pull the advisors and then we look at what actually are being purchased from an ETF perspective. And ETFs are great as a sentiment mechanism alongside advisor sentiment, because they can be purchased generally more short term, they're a little bit easier to purchase than mutual funds and the flows are well known, we can see the daily flows of ETFs. What we've seen overwhelmingly in Canada, and overwhelmingly the ETF market is advisor-driven in Canada, is fixed income. And that's it. So, we had about $12 billion in ETFs this year, which isn't bad given the market circumstances. And I believe the mutual fund industry is sort of like flat to redemption. So, it's been a huge year for ETFs relative to mutual funds. But of that $12 billion, $7.5 billion, this is going to July 30th, is in just broad investment-grade fixed income that yields a little bit less than 3%.

So, regardless of what the sentiment is telling us, all that is being purchased right now are bond ETFs. So, there's a lot of fear built in. So, even if the view is that equities are going to increase, there's not a view that equities are going to increase and I'm actually buying them right now. What is being purchased overwhelmingly is fixed income. And it's not just Canada. In the US., we've also seen about over – you know, well over $100 billion in ETF inflows this year. But $75 billion of that has been in fixed income once again, and broad fixed income. So, that's real capitulation on the part of investors where they're buying these broad index strategies that are low costs, they have high duration, the major one in Canada has over 8 year duration and yields a little bit under 3%. And that's where money is going.

Saldanha: The flows seem to indicate that there is a significant amount of fear in the market. What kind of risks are driving this fear?

Noble: What we're finding really interesting about this is that the sentiment and the flows suggest that we're on the precipice of some sort of financial crisis. Like, we haven't seen this kind of fear in the market since around 2010-2011, which seems a little bit misplaced, only because, yes, are things economically as good as they were at the end of 2016? No, but they're still a lot better than they have been at other points in the decade. I mean, earnings continue to grow. They're not at record highs, but they're still fairly strong. Jobs and unemployment remains strong. Economic growth is sort of meandering. So, there's probably an overshoot to the downside here. And so, I think the biggest risk that investors have is that they're missing out on probably opportunities to generate some more gains, particularly from the equity side.

And all this fear about equities – I mean, I just looked – you know, the U.S. and Canadian equity markets have kind of been lockstep up this year. They're both up 15%. And people are decrying a decline in what's occurring. Well, you're up 15%. That's still much better returns than what you were getting with a coupon payment on fixed income. And fixed income sort of had its run, right? The big transition that occurred in 2014, where we saw credit spreads widen, we saw interest rates sentiment shift, that created a real opportunity on fixed income. But I think what's happening is, investors now being too cautious are giving up on potential upsides in some really interesting sectors, like the gold sector, like the technology sector, where there's a broad technological theme. So, I mean, what I'd be worried about is investors battening down the hatches too early and missing out on potentially buying opportunities in these really interesting growth sectors.

Saldanha: So, in the face of this, what should investors do right now?

Noble: Well, we've been looking at and we've been talking a lot about it – our firm is looking at some of the emerging sectors. For example, one of the sectors that really hasn't bounced back to the same degree is sort of the global technology sector. I mean, it's come back in a huge way, but it was sold off big time in 2014. That is a massive major economic trend. So, regardless of whether we enter some sort of recession in 2021-2022, and I don't have a crystal ball, and there's no consensus on that. The trend, the secular trends of things like artificial intelligence, big data, augmented reality, all these new technologies, these have now provided a huge discount. And so, we think there's probably some opportunity to look at some of these technologies.

The other aspect is, looking outside of the United States. So, United States has been the leader for a very long time. But one of the reasons there's a large trade war happening right now between China and the United States is a tacit recognition that by the end of the next decade, the vast majority of the world's middle class and consumers are going to be in East Asia and Southeast Asia. So, as a result, there's a huge amount of growth to be had. Are there bumps along the way? Certainly. But the valuations of places like China, Hong Kong, India, those kinds of equities have been beaten down quite a bit, but they have a whole different sphere of influence. The goods and services that they buy are very different than what we do in North America. So, there's a whole litany of technology and service companies that would be very interesting. And there's a number of ETFs that can be purchased either through us or other companies where you could get exposure to some of these themes at a big discount to what U.S. equities and Canadian equities are trading at.

Saldanha: Thank you so much for joining us today, Mark.

Noble: My pleasure.

Saldanha: For Morningstar, I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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