Top ETF Has Biggest 2017 Outflow as Canada Readies Rate Hike

  • Investors withdraw $278 million from Canada’s biggest ETF
  • Central bank expected to raise the benchmark rate Wednesday

Investors appear to be fleeing Canadian shares before the first potential interest-rate increase in seven years.

Traders withdrew C$358.1 million ($278 million) last week from the iShares S&P/TSX 60 Index ETF, the biggest exchange traded fund tracking Canada’s benchmark index. The outflow was the largest since early December, when investors were pouring into U.S. stocks following the election of President Donald Trump. Another C$20.2 million was withdrawn on Monday.

Canadian equities are the second-worst performers among developed markets this year, battered by a drop in commodity prices and a looming slowdown in housing. The lag however downplays the strength of the economy, which has been growing the fastest among peers, setting the stage for the Bank of Canada to tighten rates on Wednesday.

"Our market is unloved by global investors," Steve Belisle, senior portfolio manager at Manulife Asset Management, said by phone from Montreal. The drop in some sectors is unjustified and presents a buying opportunity, he added.

Belisle recommends buying electricity producers like Boralex Inc. and pipelines like Enbridge Inc. Even though both are rate-sensitive stocks, the market has already priced in the possibility of a hike and they are cheap relative to their global counterparts, he said.

Bloomberg will liveblog the Bank of Canada’s rate decision and Governor Stephen Poloz’s news conference. Follow the TOPLive blog here.

Expectations for an increase in borrowing costs has surged to 92 percent from 5 percent a month earlier, based on overnight index swaps data compiled by Bloomberg. Governor Stephen Poloz will raise the benchmark rate to 0.75 percent on Wednesday from 0.50 percent, according to 23 of 32 economists in a Bloomberg survey, while the rest see no change. Finance Minister Bill Morneau on Monday declined to comment on the decision, but said the economy is "firing on all cylinders."

Life insurance companies have outperformed the broader market since the central bank last month first signaled its willingness to raise rates, while rate-sensitive sectors like utilities, telecoms, REITs and consumer stocks have underperformed. The S&P/TSX Composite Index is down 1.5 percent in the same period.

A review of equity performance following Bank of Canada tightening cycles over the past dozen years shows that materials stocks tend to significantly outperform all other sectors of the Canadian market in the three months following a rate hike.

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