What’s Happening to the Canadian Market?

There is a saying that goes “follow the smart money”. Easier said than done on a regular basis, one would argue. Concur. However, it is often important to watch and be aware of money flows, as they suggest the general appetite for sectors and/or stocks within that sector. Below, we will paint a picture of the XDV – the iShares Canadian Select Dividend Index. The index, as one would expect, is full of all the strongest brand names in the Canadian Market, or trading on the S&P/TSX index. Some time ago (2014), we started scratching our heads and wondering about Canada. Maybe it was the oil or energy decline, maybe it was gold selling off, maybe it was housing prices continuing higher, maybe it was everyone wanting to own dividend stocks? Either way, we found ourselves wondering why anyone would be super excited about chasing 3% dividends?

We took a look at fund flows. If everyone was moving out of an asset class, clearly this could not be good for the sector, right? Sometimes, it takes a while for the market to wake up to the underlying reality of what is really happening. The XDV was and remains an interesting proxy for fund flows into and out of the highest quality Canadian dividend stocks. One could argue that smart money would just buy one of the big banks versus buying the index, right? Maybe, but some large pools of money today use indexes for liquidity and diversification. In looking at the XDV, we noticed fund flows going down and the price continuing higher. The chart below demonstrates the relationship.

Was the smart money moving out and the price moving higher? It is difficult to tell for sure if this was happening, but it was clear that there was some deleveraging from the Canadian landscape happening over the past couple of years. The number today is and remains negative, with less interest in Canada. Has it bottomed yet? That’s likely a whole other blog.


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