Coming Up: Canadian Pols Face Off

Editors’ Note: MarketMinder is politically agnostic, preferring no politician nor any political party. We assess political developments for their potential market impact only.

September’s political calendar, which already included general elections in Norway and Germany, got busier over the weekend when Canadian Prime Minister Justin Trudeau called a snap election. Canadians will vote on September 20, when Trudeau hopes his center-left Liberal Party will win an outright majority, improving on their current minority government. If that were to happen, it risks ending the gridlock that Canadian stocks have enjoyed since 2019, making this a vote worth watching. However, even with the Liberals’ wide polling lead, that majority isn’t a given, and we don’t think knee-jerk investment reactions are wise. 

Trudeau’s logic is easy to see. Since 2019’s election, when the Liberals lost their majority in the wake of some high-profile scandals, he has had to rely on support from smaller parties to pass legislation. That has stymied most major initiatives aside from COVID relief, as even when rivals like the leftist New Democratic Party (NDP) agree on some of the broad brush strokes, politicking often gets in the way. Meanwhile, despite Canada’s long-lasting lockdowns, Trudeau and the Liberals have gained popularity with voters due to the country’s successful vaccine campaign and fiscal response. Those gains came as the opposition Conservative Party’s (aka the Tories) new leader, Erin O’Toole, has struggled to gain a foothold within his party and with voters at large. Strong polling, plus a seemingly disorganized opposition, appears to have Trudeau believing a majority is there for the taking, enabling the Liberals to accomplish much more of their agenda.

Reality, however, is more complicated. Yes, the Liberals currently poll at 34.7%, according to the Canadian Broadcasting Company’s poll tracker, while the Conservatives clock in at 29.3% (followed by the NDP at 19.6%).^[i] Yet national polls don’t mean a lot in Canada, which votes by electoral district, or “riding.” National contests usually come down to swing districts in suburban Toronto, Vancouver and Quebec, which generally depend on the campaign. Trudeau portrays the contest as a referendum on pandemic leadership, and that has been a winning prospect in some recent provincial elections. But he is already taking a lot of flak from opposition leaders for sending Canadians to the polls while the Delta variant is still making life complicated. If that narrative gains momentum, it could be a hindrance.

There is another strong counterpoint to the notion of polls and incumbency being a tailwind: Nova Scotia, which held provincial elections on Tuesday. The Liberals have governed there since 2013 and were seeking a third term. Entering the campaign a month ago, they had a 15-point lead over the Tories.^[ii] But momentum shifted radically over the next month, with the Liberals and their provincial leader, Iain Rankin, stumbling out of the gate as scandals and intraparty controversies took center stage. That left an opening for the Tories and their provincial leader, Tim Houston, who narrowed the gap considerably. By Election Day, the Liberals’ edge was down to just 3.6 points, within the margin of error.^[iii] Observers anticipated a close contest with counting stretching well into Wednesday. But in the end, it wasn’t close. By Tuesday night, it was clear the Tories had a majority and had defeated multiple provincial cabinet ministers in the process. The latest tally gives them 31 seats, a net gain of 13, while the Liberals lost 13 and have just 17.^[iv]

Now, one provincial election doesn’t predict a national contest. The issues that hampered the Liberals centered on local personalities and likely aren’t a factor nationally. Moreover, it isn’t clear yet whether O’Toole will prove as popular nationally as Houston has been in Nova Scotia. Still, the results show campaigns matter and even big poll leads aren’t etched in stone. Grass roots efforts, gaffes, debates, headlines, voters’ general mood—they all have an effect, and they are generally impossible to predict.

Therefore, while it is possible Canadian gridlock goes away, it isn’t necessarily probable now. Even with the Liberals’ current five-point lead, pollsters translate their seat count to 165, which is five shy of a majority. Markets care most about probabilities, not possibilities, making this mostly a wait and see issue. Political uncertainty isn’t guaranteed to continue or rise after September 20.

Moreover, while politics is a market driver, we are likely at a point in the bull market where sector and stylistic features have a larger influence on Canadian returns. Canadian markets are heavy on Energy and Financials—value-stalwarts. That generally favors Canada when value is leading, but growth has led cumulatively since this bull market began in March 2020 and has been on a relative tear since mid-May. Not coincidentally, Canada has underperformed global markets as growth has regained primacy.

So overall, we think Canada’s value bias is probably a bigger headwind for stock returns than potential uncertainty in Ottawa. In maturing bull markets, which we think stocks are presently in, investors generally flock to companies whose earnings growth comes from long-running trends, not the economic cycle’s whims. Companies with strong brand names, big global footprints, diverse revenue streams and fat gross margins—all characteristics of growth stocks, not value. However the election goes, Canada’s relative lack of growth stocks probably dampens relative returns, in our view.