By David Rosenberg and Julia Wendling
Sept. 7, 2021
Canadians are heading to the polls on Sept. 20, so it’s prudent for investors to take a look at the different party platforms and assess the implications for key asset classes under the most likely outcomes.
The reigning Liberals are certainly grasping the opportunity to sway voters enough to form a majority government. But their popularity has begun to rapidly dip since the beginning of the election campaign, with the probability of attaining the 170-seat threshold needed to form a majority government slipping in tandem (the Justin Trudeau government currently holds 153 seats).
Indeed, the CBC pegs the odds of a Liberal majority government at 15 per cent, quite a bit below the 47-per-cent likelihood of seeing Trudeau form yet another minority government. Meanwhile, the opposition Conservatives have slowly begun to close the gap, picking up many of the projected votes the Liberals are losing (the CBC places a 34-per-cent probability of the Conservatives winning a minority government and a three-per-cent chance of the party capturing a majority). The remaining key parties have all held relatively steady since the start of the election campaign.
The mandates outlined so far give us an indication as to where federal funds will be concentrated over the near and intermediate term under each party’s reign. Of note, the economic policy of the Liberals and the NDP have noticeably shifted left: the Liberals, with the gobs of fiscal stimulus that were pumped into the Canadian economy throughout the pandemic, have begun to resemble the traditional NDP. Indeed, over Trudeau’s tenure, the federal government deficit has gone from 0.4 per cent of GDP in the last quarter of 2015 to -13 per cent by the first quarter of 2021.
Meanwhile, the Conservatives have embraced the Liberals’ “spend, spend, spend” economic policy while still remaining at the right end of the political spectrum when it comes to social policy, particularly with respect to immigration and fossil-fuel-related policies.
In the accompanying table, we analyzed the performance of bonds, stocks and the Canadian dollar by four key government types: Liberal majority, Liberal minority, Conservative majority and Conservative minority.
Now, a note of caution when looking at the situation from a historical lens: the pandemic disruption has put the Canadian political landscape in the unique situation where all three major parties intend to provide the economy with ample fiscal support until it has fully recovered from COVID-19-induced losses (though specific policies, of course, differ substantially).
Over the near term, the election result is unlikely to have a resounding impact on the Canadian investment environment. Instead, as the country braces for the virus’ fourth wave, with new case counts stubbornly back on the rise, the performance of bonds, equities and the loonie will likely be hitched to external factors, including the trajectory of the pandemic, secular disinflationary trends and the global commodity trade.
Bond performance is likely to remain muted in the short term, with inflation fears still in high gear following the release of the fourth year-over-year three-per-cent CPI reading. However, this may prove to be a good buying opportunity as the pre-pandemic trend of lower yields will likely resume, because key disinflationary forces, including aging demographics and globalization, are expected to prevail, even in the face of blowout government spending. Canadian bonds will likely remain a fairly attractive option for investors, given the solid historical performance across the different government structures we analyzed.
As for the Canadian dollar, we expect the recent weakening trend to continue, due to heightened pandemic-related risks over the near term and little support from the sputtering commodities trade. Beyond the COVID-19-induced disruptions, the stagnant performance of the currency since the Liberals took power in 2015 would likely continue should Trudeau’s election campaign prove successful.
Despite poor performance under Conservative leadership historically (likely due to less accommodative fiscal policies, which tend to weaken currencies), and with the current Conservative party more liberal in its economic policy, the loonie’s performance under an Erin O’Toole government versus a Trudeau one is unlikely to substantially differ.
The picture for the S&P/TSX composite index is slightly more muddled. Like its counterparts in the United States, the Canadian equity benchmark, since bottoming in March of last year, has put in an impressive performance, hitting one record high after another. But with enhanced risks of an economic slowdown, we don’t expect this recent stellar performance to continue much longer, which nicely aligns with the weaker-than-average forward returns predicted by our Strategizer Model.
That said, as always, opportunities exist beneath the surface. Regardless of the election’s outcome, investing in clean-energy technologies remains a prudent strategy since all three major parties plan to boost spending to tackle the climate emergency and meet the Paris Climate Agreement. The same goes for investing in the health and life-sciences subsectors.
If the Liberals win, we are likely in for another bout of weak performance in the energy sector, while the Conservatives’ more fossil-fuel-friendly policies (for example, support for the offshore oil industry in Newfoundland and plans to expand natural gas production) would help support this sector that accounts for a hefty 12-per-cent weighting of the index.
Another subsector that stands to suffer from a Liberal win (particularly if they form a coalition with the NDP) is telecommunications, which could be in for some major reforms. The NDP have their eye on establishing more affordable and consumer-friendly internet and cellphone plans.
Ultimately, the upcoming federal election is unlikely to prove to be the be-all-and-end-all for investors looking to add exposure to the Canadian market. Instead, the key over the near term is to keep an eye on the pandemic, while the longer-term performance of Canadian assets will likely remain tied to secular trends that existed before the pandemic as well as the commodities cycle.