Act Local but Look Global: Post-election thoughts

With the Liberals remaining in power with a minority government, we don’t expect any dramatic changes to the platform they have put forward previously, but losing their majority in parliament means they will likely have to team up with either the NDP or even Bloc Quebecois to pass legislation. However, Canadian equity and bond markets are more often driven by global economic forces. It’s important to remember that the Canadian economy makes up only 2% of world GDP, so in the grand scheme of things issues such as U.S.-China trade, global economic growth, corporate earnings and even the US political outlook can have a larger impact on our markets than our own domestic politics.

Challenges facing the energy sector

National politics do of course matter. In addition to the current issues facing the Canadian energy sector like weak oil prices, lack of investment and capacity bottlenecks on pipelines, there will likely be additional concerns as energy continues to be a divisive issue among the various political parties. The situation is of course fluid but both the NDP and the Greens may come out against new pipelines, the Bloc Quebecois is against a cross-country energy corridor passing through Quebec, while the Conservatives are anti-carbon tax and more pro-energy. Climate change will likely become a central issue if Prime Minister Trudeau teams up with the NDP who are more in favour of aggressively fighting climate-change, which directly affects Canada’s energy industry. Foreign investors in the energy sector will likely still feel uncertain in the government’s position on energy policy, which could impact their investment decisions.

Increased division

The new electoral map shows the increasing divisions across Canada as different regions split among party lines. Conservatives concentrated in three western provinces, the Bloc Quebecois saw a resurgence in Quebec, while Liberals won strongly in Toronto and Montreal but saw few wins outside of large cities and Atlantic Canada. These divisions appear to be getting stronger and the rhetoric more aggressive, making it hard to see decisive majority governments in the near future for any party. Additionally, these divisions increase the risk for inter-provincial clashes that could hurt trade and investment.

Fiscal spending

The near-term fiscal picture is unlikely to change dramatically but the promised increase in fiscal spending should help the already decent Canadian economy. Although the Bank of Canada has room to cut rates in a slowdown, other global central banks arguably have less monetary bullets to spend in support and/or defense of economic growth. This should put Canada in a good position to react to signals of declining growth and may allow the government to get ahead of it with some fiscal spending coming on the heels of election promises. The concern of course is longer-term as fiscal spending today takes potential growth away from tomorrow as deficits rise and fiscal room is reduced.

Implications

Generally, a minority government holds power for about two years, but with the sharper divide regionally and among urban vs. rural voters, we could be in a prolonged period of minority governments and increased uncertainty. The fiscal spending boost should be positive for the economy in general but does create less room for spending in the future. Challenges and uncertainty in the energy sector may continue and crimp future investment.

Indeed, it has been a tough year for net foreign investment and inflows into Canada. Canadian stocks have seen diminished interest from foreigners and investment into the energy sector remains moribund. Within an investment context, Canadian stocks and bonds remain, in our view, more tied to the outcome of larger global issues rather than the domestic ones that were the focus of this election.

Michael Greenberg’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

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