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Capital Markets report

Prepared by:
Financial Sector Policy Branch
May 2004

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Table of Contents

In a context of improving investor confidence and continued low interest rates, but also of geopolitical upheaval, the year 2003 saw some sectors of Canadian capital markets regain buoyancy while others continued to grapple with challenges.

With respect to early stage financing, Canadian venture capital (VC) activity declined over the first half of 2003 but saw a modest uptick as the year wore on. VC activity in both Canada and the U.S. has been in overall decline since peaking in 2000, but the Canadian VC industry performed relatively well, ranking second internationally in per capita levels of activity in 2002. However, performance data recently released by the industry indicate that near- and medium-term returns to investors have generally been weak.

In fixed income markets, the main story in 2003 was the extension of investor appetite for yield and willingness to take on credit risk. The spreads on investment grade debt tightened somewhat over the year, but spreads on high yield debt decreased significantly, with Canadian high yield bonds continuing to be marketed primarily in the U.S. Net issuance of corporate debt was subdued compared to the years from the mid-1990s until 2002, constituting a substantial pause in the so-called "crowding in" phenomenon of impressive overall growth in corporate issuance since net government issuance began its sharp decline.

In contrast to private equity markets, public equity markets rebounded in 2003, both in Canada and globally, registering overall gains for the first time in four years. Nevertheless, initial public offering (IPO) activity was sluggish, particularly in the U.S. In Canada IPO activity was stronger, although well over 80% of money raised from new offerings was in the income trust sector, which continued to grow dramatically in 2003, albeit at a slower pace than in 2002, with total market capitalization approaching $60 billion.

The major story in foreign exchange markets was the dramatic rise in the Canadian dollar, which by year-end had attained decade-high levels against its U.S. counterpart. This was generally attributed to U.S. dollar weakness, although the Canadian dollar held its own against other major currencies as well.