Canadian equities draw global capital as investors rethink portfolios

Each month at BPM, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're focusing on Public Equities.

Global investors are pouring money into Canadian equities and fixed income at a pace that has caught even seasoned allocators off guard.

Record inflows into Canadian ETFs and mutual funds, a AAA sovereign credit rating and growing demand for raw materials have turned Canada into one of the more attractive destinations for institutional capital, but the case isn’t as simple as home bias vindicated, argues Tiago Figueiredo, macro strategist at Desjardins based in Toronto.

“A lot of people used to look at the US as a source of stability in the world. That's no longer the case,” he said. “While the US still has a competitive edge in the sense that a lot of the AI-related investment is based in the US and they're a leader in that space, what we're starting to see now is that Canada as a whole is becoming a much more desirable place for foreign investors, even for domestic investors.”

On the equity side, he highlights the TSX offers what the S&P 500 can’t: diversification away from US technology and direct exposure to the commodities that countries need as they pursue energy independence and economic resilience. That resilience framing is essentially central to his thesis.

According to Figueiredo, the global economy is moving away from prioritising efficiency and toward building resilience – and that transition is costly. It’s one reason bond yields have kept climbing, and one reason Canadian assets have attracted capital on both the equity and fixed income side, despite an institutional exodus from domestic allocations over the past decade.

Figueiredo explains this is driven by its fiscal discipline, its AAA sovereign credit rating and the TSX’s natural diversification away from US technology. The index also gives investors exposure to raw materials that are in higher demand as countries pursue energy independence.

The trouble with bonds, US dollar and fixed income

What’s essentially happening, Figueiredo suggests, is that the correlations that institutional investors relied on for decades have become far less dependable, noting how bonds no longer reliably offset equity losses, and the US dollar has stopped functioning as a risk-off hedge. He calls this “a wake-up call” for Canadian investors with unhedged US exposure who found themselves losing on both the currency and equity side at the same time.

“The traditional hedges that you would typically look for aren’t as reliable anymore,” he said. “What that means is you really have to get a bit more creative on how you’re choosing to hedge your equity risk, whether that be looking at options or things that cost money to kind of hold.”

Commodities, once dismissed as an expensive drag on returns, have taken on a larger role, he noted, adding supply shocks have become more frequent in the post-COVID era, and when they hit, commodities have delivered.

“Pre-pandemic, you had a perfect world where you held bonds, they gave you somewhat of a coupon, and you didn't really have to pay anything for that. Nowadays, that's very different,” he added.

Meanwhile, fixed income as an asset class has become riskier on both sides of the ledger as hyperscalers are borrowing aggressively – effectively price-insensitive – while the buyers replacing central banks, sovereign wealth funds and pension plans are hedge funds with far less tolerance for holding through drawdowns.

In the US, official accounts have been pulling back from Treasuries. Canada is seeing the same pattern, if less pronounced, he noted.

Regional diversification no longer delivers what it promises

On the equity side, the old assumption that geographic diversification reduces risk no longer holds up under scrutiny. Figueiredo points to the MSCI Emerging Market Index, where roughly half the weight sits in Taiwan and South Korea – both heavily exposed to AI. The return drivers end up looking a lot like the S&P 500, offering far less diversification than the label suggests.

Geopolitical risk has reinforced the point. The Strait of Hormuz situation exposed how vulnerable the world’s critical shipping lanes are, and Europe bore the brunt. Investors have pulled capital out of Europe for most of this year and redirected it toward North America, where energy dependence is lower.

“It’s no longer just a function of ‘Let’s buy equity indices across the world’. It’s much more understanding the different factors that drive returns,” said Figueiredo.

Institutional investors rethink downside protection

The bigger shift, Figueiredo argues, is in how investors approach allocation itself. The point is not to abandon fixed income but to be “much more selective about what they choose to own,” he said, noting bonds now serve primarily as an income source rather than a reliable hedge against equity drawdowns.

That also leaves the question of how to manage downside equity risk. Options and other hedging products carry a cost, but an unusual market dynamic has made one approach more attractive than expected. Individual stocks have been volatile, yet the broad index has remained relatively stable.

“Buying downside risk on the index is actually much cheaper than you would expect given all of the other moves that we’re seeing in asset classes,” he said.

For pension funds that have already committed billions in new capital to Canadian assets, the question is whether to lean even further into domestic equities.

“For investors that weren’t overweight going into this period, I don’t think that the US is necessarily an underweight at this point. I don’t think that you need to lean more into Canadian equities because of that,” Figueiredo added, underscoring a neutral US weighting over the next 12 months is, in his view, the right call.

Within Canada, he expects financials, energy and materials to drive TSX performance heading into 2027. Much depends on whether the federal government’s Major Projects Office can deliver on its promise to cut regulatory red tape.

“The issue in Canada was never that capital didn’t want to come to Canada. There was a lot of red tape that made it more challenging,” he said. He calls the office “an unproven mechanism” but a promising one, and said progress on listed projects could boost infrastructure, oil and gas, and resource extraction companies.

The risks that lie ahead for institutional investors

Ultimately, Desjardins is cautiously optimistic on equities heading into year-end. A wave of negative headlines around AI, rising bond supply and sticky inflation data have made markets choppy, but Figueiredo sees the US midterm elections as the event that clears the path and expects stabilisation heading into year-end.

The risks that could snap correlations back to historical norms, he argues, are concentrated in two places: a slowdown in US economic growth and a loss of confidence in the artificial intelligence capital expenditure cycle that global investors have been pricing in.

“The bar is much higher now than it was before,” he said.