Things Are Coming Unglued For Canadian Investors

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Includes: EWC, FCAN, HEWC, QCAN
by: Wolf Richter

Investor Sentiment Hits Worst Level Since March 2009

The oil price plunge is mauling Canada's oil producers, particularly those active in the high-cost tar sands. It's tripping up the oil patch economy, and contagion is spreading beyond the oil patch. The Canadian dollar has lost one-third of its value against the US dollar since 2012. One of the most magnificent housing bubbles the world has ever seen appears to be peaking and is already deflating in some cities. And the Toronto stock index is down 25% since August 2014.

No wonder Canadian investors are frazzled.

And the semi-annual Manulife's Investor Sentiment Index put a number on it: Canadians' investment sentiment fell another 3 points from its beaten-down levels six months ago to 16, the lowest level since March 2009.

The index is a composite of investor perception about six asset classes - stocks, fixed income, cash, balanced funds, investment property, and investors' own homes. It has ranged from an all-time high of 34 in 2006, during the halcyon days just before the Financial Crisis - when everything was still possible - to its all-time low of 5 at the end of 2008, at the depth of the Financial Crisis. By March 2009, it was at 11. Since then, it has hovered in the mid- to high-20s.

The survey, conducted in December, doesn't yet include the impact of the sharp decline in oil prices to new cycle lows and the decline in stock prices since the holidays. At this point, the index hasn't yet reached the level of desperation during the depths of the Financial Crisis, but it's getting closer. The report:

Along with eroding investor sentiment is the feeling among Canadians that they are in a worse financial position than they were two years ago (26%).

Canadians are increasingly viewing housing as a less attractive investment having dropped three points in the last year. The two largest drops were in British Columbia (13 point decrease since November 2014) and Ontario (decreased six points in the same time period).

Those two provinces are the epicenters of the Canadian housing bubble. According to the Teranet National Bank House Price Index, since the peak of the prior insane housing bubble in 2008, home prices in Vancouver have soared another 40% and in Toronto another 54%.

Canadians know that this is a bubble, that these prices are unsustainable. They know that this bubble, like all bubbles, will eventually get pricked. It's just a question of when. In some cities, home prices are already declining. And investors, according to the report, are no longer blind to it.

Manulife Asset Management's Senior Economist Frances Donald explained that "the growing perception among many Canadians is that housing has become overvalued."

This impacts the sentiment about investing in housing as investment property, and Canadians are less likely to pump money into the sector. But it also impacts homeowners' intentions to invest in their own homes. That index fell 5% in six months. As the report put it:

Homeowners may be feeling that the additional benefits of investing further in their own home will not be reflected in the future value of their home.

This is probably more true in Toronto and Vancouver and surrounding areas, where house prices are considered to be more overvalued than in other regions.

And it hit other asset classes as well, as investors are grappling with "a long list of uncertainties, including tremendous volatility in both oil prices and the value of the Canadian dollar." The report's chart shows how investor sentiment swooned as oil prices collapsed and as the Canadian dollar fell.

Over the past six months, Canadian investors lost confidence in mutual funds (down 8 points), ETFs (down 7 points), and balanced mutual funds (down 7 points), while fixed income remained at the same low level (3 on the index).

And the Bank of Canada should take note: 77% of the investors said that interest rates, whatever they may be in the future, will not have any impact on their investment strategy. So, if the BOC thinks it can re-heat investor passion for housing and stocks by slashing rates further after the two rate cuts last year, it should think again.

Investor sentiment surveys are intended to be predictors. Strong sentiment about an asset class indicates investors intend to throw their money at it in the future, and this activity itself would be expected to drive up prices. On the other hand, when investors get frazzled about an asset class, and particularly so many asset classes simultaneously, it indicates they're likely to try to liquidate some of their investments and take money off the table, putting further pressure on those asset classes.

This would be precisely what could prick Canada's magnificent housing bubble. And then all bets are off.

Owners of small businesses in Canada have been feeling the blues for months. In January, their optimism dropped to the lowest level since March 2009, as Alberta fell off the chart. Read... "Crushed Currency, Oil, Domestic Demand Broadside Small Businesses in Canada, Worst since March 2009."