Midas Letter excerpt:
With the S&P TSX Venture Composite now hovering about 80 points lower than its closing on November 29, 1999 – the first day of its existence – participants in the beleaguered market are getting stressed.
That’s because, with China devaluing its currency in an effort to bolster its weakening economy, and commodities showing no signs of improving, the future is looking bleak. At the current rate of index performance deterioration – the most obvious sign of capital flows in Canada’s Venture market – we will be at zero by mid-next year.
As of Friday August 14th, the Venture has closed down for 20 consecutive trading sessions.
The impact that such a rate of capital flight will have on the broader Canadian economy is in evidence now. As mining and oil and fas companies have led the sell-off, firms around the world are categorizing Canada, with its steadily weakening currency, weakening economy, and deflated markets, a ‘no-go’ zone. In other words, desks in banks and hedge funds are increasingly mandated to eliminate and avoid any risk equities denominated in Canadian dollars.
Evidence of this is apparent in StatsCan’s economic reporting. In today’s release for example, The Daily reportedForeign investors added $8.5 billion of Canadian securities to their holdings in June, following a $5.5 billion divestment in May. At the same time, Canadian investors acquired $8.6 billion of foreign securities, all non-US instruments.
In the second quarter, Canada’s international transactions in securities generated a net outflow of funds from the economy of $4.4 billion, as Canadian investors placed more funds abroad than foreign investors placed in Canada.
So what the numbers show is that for the most part, foreign investors in Canada are concentrated in corporate debt and bonds, while equities suffer. In the case of the TSX Venture, where fewer corporates are able to attract debt on reasonable terms, outflows are indicative of a general absence of confidence in the Venture sector in its entirety.
