Foreign investors are crowding in Canada’s debt market. According to Statistics Canada, the $51.4 billion worth of federal government securities bought by investors from abroad in April 2020 was the highest. Among the purchases were government bonds ($15.8 billion) and money market instruments like treasury bills ($10.8 billion).
These international buyers also scooped up $24.5 billion worth of corporate bonds. But the intriguing part of the data is that they dropped Canada’s stock market like a hot potato. The group sold $4.9 billion worth of TSX stocks and investment fund shares in the same month.
Should investors take it to mean the TSX is no longer palatable and appealing? Is it also time to sell?
The best quarter in decades
The foreign investors must have misread the market or made a wrong assessment. Canada’s main stock market index posted its best quarter in more than a decade in the second quarter of 2020. The rally coincided with gold prices reaching its highest level since 2011.
On June 30, 2020, the 15,515.22 closing was 15.96% over the first-quarter ending. The surge in gains came after a horrific March. Year to date, the TSX is down by only 8.51%. Investor optimism is back, as the stock market springs back to life.
Canada’s image abroad
The record-setting purchase of government securities and corporate bonds signifies that the country is a good sovereign risk. Canada issued a considerable amount of federal debt to fund its COVID-19 Response Plan, and buyers came rushing.
Royce Mendes and Katherine Judge from Canadian Imperial Bank of Commerce’s (TSX:CM)(NYSE:CM) World Markets gave their observations. They said, “The strong inflows into Canadian debt markets reveal that, even during the height of the crisis in this country, Canada was seen as an attractive place to park funds.”
The TSX remains a fertile investment ground given its lineup of blue-chip stocks for income investors, long-term investors, and retirees. CIBC, for one, is a profitable option. The fifth-largest bank in Canada pays the highest dividend (6.41%) in the banking sector.
CIBC has never cut its dividend payouts to shareholders since the bank started the practice in 1868. According to its CEO Victor Dodig, management knows how incredibly important the dividends are to CIBC investors, especially during the pandemic. He adds that Canada’s banking industry is well capitalized.
The bank is making sure the dividends will keep flowing to lessen investors’ anxiety in the wake of the financial turmoil. In Q2 fiscal 2020, CIBC raised its credit loss provision to $1.41 billion. Despite the 71% drop in earnings due to this move, CIBC’s capital position remains strong.
Digital banking is now trending in Canada, and CIBC’s mobile banking app is the industry leader. The bank saw a 250% increase in utilization among Canadian seniors 65 years and older. July is an excellent time to initiate a position in CIBC, while the price is less than $100 per share.
Not lacking in appeal
Canada’s debt market is attracting droves of foreign investors and helping increase government revenue during the COVID-19 pandemic. While the stock market isn’t as appealing to them, it shouldn’t discourage people from investing because of the many blue-chip assets available.