Canadians Pick the Status Quo

Editors’ Note: Our political commentary is intentionally nonpartisan. We favour no politician nor any political party and assesses political developments for their potential economic and market impact.

Well, that was anticlimactic. Five weeks after Canadian Prime Minister Justin Trudeau dissolved Parliament and called a snap election in hopes of his Liberal Party winning an outright majority, the results are in: The Liberals remain in power, but they still have a minority government and will have to rely on help—chiefly from the leftist New Democratic Party (NDP)—to get anything done. Moreover, three of Trudeau’s cabinet ministers lost their re-election bids, and many onlookers are grousing about the indecisive campaign, potentially leaving the government with less political capital than they had going in. Most coverage we have seen dwells on the political optics and Canadians’ reported frustration with being asked to vote during the middle of the Delta variant’s surge. For equities, we think that is all sociology and beside the point—what matters for returns to an extent, in our view, is that political uncertainty has eased and gridlock within Canada’s Parliament likely persists for the foreseeable future.

Exhibit 1 shows the latest tally of the results and how they compare to the last parliament. With 98% of votes counted, the Liberals have gained just three seats in the House of Commons, whilst the Conservatives have no net change. The real losers, we guess, were independents, who had five seats in the previous Parliament and have none now. Close on their heels are Green Party leader Annamie Paul, who came in fourth in her race as her party lost support nationally, and the People’s Party of Canada—a right-leaning party started by former Conservatives frustrated with party leadership—which won zero seats.

Exhibit 1: Canadian Election Results

Source: Elections Canada, as of 21/9/2021. One seat was open in the previous parliament.

Our research shows equity markets don’t care about politicians’ personalities or parties. Rather, we think they care primarily about policies and the likelihood of major changes to property rights and other issues that could affect businesses’ ability to make long-term investments and plan for risks. Like the major political parties in other developed nations, our research shows Canada’s centre-left Liberal and centre-right Conservative parties are equally capable of ratcheting up legislative risk. So when Trudeau called the snap election whilst his party had a six-point lead over the Conservatives, according to the CBC News Poll Tracker, we think the risk for equities was a government—any government—winning an outright majority. That would have reduced or ended the gridlock that we think helped keep legislative risk to Canadian shares low since the prior election in 2019.

This is the status quo this week’s election extended. It likely complicates the path forward for many divisive measures, potentially forcing the government to water them down. Perhaps, perhaps, the Liberals can get something like the mooted bank profit surtax approved with the help of the NDP. But that remains to be seen, considering the NDP have stated they favour a broader raft of tax hikes than the Liberals.

Of course, our research shows politics are only one driver of equity returns. We think election does ease the uncertainty that loomed over Canadian equity markets this summer, and the outcome may provide some relief to markets. But we think sector-specific factors probably matter more—in this case, Canada’s strong tilt toward Energy and Financials.^[i] Canada outperformed the world handily in 2021’s first half, as Energy shares globally went on a tear, but it has underperformed alongside Energy since June, erasing most of its year-to-date advantage.^[ii] That seems to us like a decent microcosm of what we view as likely on the relative return front as the broad rise in equity markets that began in March 2020 progresses: Canada’s fortunes ebbing and flowing with Energy shares, whilst Tech and Tech-like companies (of which Canada has relatively few) likely continue to lead overall.^[iii]