Banking

Positive outlook following Canada election

Although the Liberals were leading in the polls throughout July and August, they fell short of a majority and will need to continue working with opposition parties to pass legislation.

Trudeau’s decision to call an election during a fourth wave of the Covid-19 pandemic was controversial and heavily scrutinised by his opponents. It is estimated that the election cost taxpayers over $600m, the most expensive in Canadian history by a significant margin. In addition, voter turnout rate was estimated to be 59%, well below the 67% rate in 2019 and 68% in 2015. Fewer polling stations, a condensed 36-day campaign period and restricted mobility due to Covid-19 were all factors contributing to the low turnout.

The Liberal’s campaign stumbled out of the blocks with the incumbent prime minister facing constant political pressure related to the humanitarian crisis in Afghanistan, inflation and the high price of housing.

In the days leading up to the election, Canada’s right-leaning political opposition, the Conservative Party of Canada, was polling ahead of the Liberals. Conservative Party leader Erin O’Toole consistently accused the Liberal government of stoking inflation with unchecked government spending.

The consumer price index rose 4.1% in August from a year earlier, marking the fifth consecutive month with inflation that was well above the Bank of Canada’s 3% cap. Although policy makers are likely to view the recent inflation figures as transitory, these figures may pose a challenge to Trudeau’s newly formed government going forward.

During the campaign, the Liberals promised a largely status quo platform which should result in a continuation of fiscal stimulus to support Canada’s economic recovery. Trudeau’s government has already spent hundreds of billions to prop up businesses and consumers during Covid-19 lockdowns and Canada now enjoys one of the highest vaccination rates in the world with 80% of its eligible population fully vaccinated.

As investors, we view these vaccine statistics positively and believe Canada is well-positioned to navigate the delta-driven fourth wave. In addition, the Liberals have pledged an additional $53bn in net new spending over five years spread across a range of initiatives including cheaper childcare, added social spending, housing affordability measures and climate plans. In the coming years, we expect that government deficits will run modestly higher and lag GDP growth, putting Canada’s national debt on a marginally slower downtrend as a share of GDP.

With broad election uncertainty behind us, Canadian investors should consider sector-specific campaign promises that may become public policy. For example, a certain degree of caution on the Canadian banks is warranted as Trudeau promised to use bank profits as a key source of revenue to pay for his spending initiatives.

Has the wind gone out of alternative energy?

With that said, we believe these risks are priced in as Canada’s banks underperformed in the weeks leading up to the election. We also view a Liberal win as a net positive for Canada’s renewable power producers as the Liberal climate policies support further expansion in renewable energy programmes.

Canadian stocks are also better positioned than their US counterparts to benefit from a rebound in global growth and there is still an unprecedented valuation gap between equities in the two countries.

Dean Orrico is investment manager of Middlefield Canadian Income Trust.

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