Canada stocks and related country-specific exchange traded funds may keep underperforming as concern builds over the housing market and lower oil prices weigh on the energy sector and loonie currency.
Year-to-date, the iShares MSCI Canada ETF (NYSEArca: EWC) is up 1.2% and the First Trust Canada AlphaDEX Fund (NYSEArca: FCAN), which employs growth and value screens to select holdings, declined 11.0%. The recently launched, SPDR MSCI Canada Quality Mix ETF (NYSEArca: QCAN), which includes value, quality and low volatility screens, has also dipped 2.8% over the past three months.
Exacerbating the fall out, a quickly depreciating Canadian dollar, or so-called loonie, has also cause greater currency risk with overseas Canadian equity exposure. For instance, the CurrencyShares Canadian Dollar Trust (NYSEArca: FXC), which tracks the Canadian dollar’s movement against the U.S. dollar, decreased 8.5% year-to-date. Since investing in Canadian equities also exposes an investor to the CAD, a weaker loonie translated to lower USD-denominated returns.
The safe-haven status of Canada’s banks are now in doubt due to persistent calls for a housing market correction and weak oil prices threaten the broader economy, writes Jonathan Ratner for Financial Post.
Due to the countries perceived commodity currency status, foreign investors have been using Canada for its energy exposure. However, the foreign investment crowd will follow the swing in energy prices. [Cheap Oil Crimps Canada ETFs]
“They use us as a light switch,” Jason Mann, portfolio manager at EdgeHill Partners, said in the article. “When they decide to leave resource stocks, they just exit Canada.”
Additionally, looking at valuations, Canada’s financials market appears to be trading near its peak.
“This market segment certainly doesn’t look like it’s at a trough, and there are plenty of arguments why it’s at a peak, so financials are a tough place to put your money,” Ramona Persaud, a portfolio manager at Fidelity Investments, said in the article.