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LONDON (Reuters) - Canada's finance minister Joe Oliver warned on Monday that investors could be mispricing risk as they hunt for better investment returns, and said policymakers should keep the issue under close review.
Oliver is in London to promote trade and investment, and told Reuters in an interview that the global economy remained vulnerable to financial shocks.
"We've said again and again ... that international financial markets are still fragile. Part of that is macroeconomic and monetary issues, but there is a geopolitical issue," he said at the London residence of Canada's envoy to London.
Canada was one of the countries which best weathered the 2008-09 global financial crisis, in part because of a tightly regulated banking sector and strong demand for its natural resources.
Yet despite deepening conflict in Iraq and ongoing tension between Russia and Ukraine, global share prices are back near record highs and borrowing costs for countries once perceived as risky are converging with those seen as safer bets.
Oliver said this raised questions about whether investors were overlooking risks as they sought better returns against a backdrop of low global growth.
"I think it's something policymakers want to look at," he said. "If it looks like there's such a desire for yield that (investors) overlook the risk ... that is something that can be a concern."
Oliver said he was not referring to Canadian assets in this context, and added that the country would welcome foreign investment, for example in its natural resources sector, which needs C$650 billion in funding over the next 10 years.
Recent tension between Russia and Ukraine also showed that Europe should look to import some oil from Canada rather than Russia, he added.
"Canada is a stable, democratic country that doesn't threaten to cut countries off for geopolitical reasons."
Oliver said the biggest problem facing developed economies now was weak growth, though he dismissed the idea that advanced economies faced long-term stagnation or that significant deficit-financed spending offered an answer.
Instead, he said he hoped that other countries continued to make progress reducing budget deficits and aimed for budget surpluses - as Canada hopes to achieve next year.
Stronger Canadian growth could be achieved by higher exports, but that hinged on a global economic pick up.
He declined to comment further on whether further strength in the Canadian dollar might jeopardize that.
Earlier on Monday he said the strength of the dollar - which has hit a five-and-a-half month high against its U.S. counterpart - might reflect higher oil prices rather than market concerns about higher inflation and the risk that the Canadian central bank could raise interest rates.
Editing by Chizu Nomiyama