ELECTION DRAWS SHRUGS FROM INVESTORS.
There is little in the election outcome
that should derail the economy
Let’s get this out of the way: the outcome of the election, as monumental as it was in the history of Canadian politics, doesn’t matter much to stock markets.
Yes, you can consult academic studies that have sought a correlation between market returns and Liberal or Conservative governments (for the record, the Libs seem to have a slight lead in those), but the correlations have more to do with timing or sheer luck than any ideological or legislative diferences.
It’s not surprising, really. With a few exceptions, the fortunes of our companies are more dependent on what’s going on in Main Street U.S.A. or Shenzhen than on decisions made in Parliament. The S&P/TSX composite was up on Tuesday not because of Justin Trudeau’s win so much as gains in gold, oil and natural gas.
The real impact of the new government won’t be measurable for months, maybe even years.
The Grits still have to put together a cabinet, and we’re headed for a few weeks of congratulatory speechifying before all those newly minted MPs take of for their long winter break.
The Liberals’ promised economic measures won’t get going until after the budget next year. Even then, the impact for markets will likely be marginal, incremental and delayed.
Despite the hand-wringing west of the Red River, we’re not going to see another national energy program à la Justin’s old man, nor wageand-price controls, nor a program of brinkmanship with Quebec, where the Grits hold the majority of federal seats as well as power in the provincial assembly.
Nor are the Liberals likely to surprise markets the way the Conservatives did a decade ago, when they banned income trusts more or less by fiat.
No, Trudeau’s cryptic “sunny ways” opening to his victory speech — a reference to the persuasive negotiating style profered by Wilfrid Laurier, who himself was referring to a fable by Aesop — suggests that anything the new government does will be well-telegraphed.
The most salient part of the election for markets is that we have another majority in the House. That means Canada probably won’t have another election for at least four years. Markets hate instability, and Canada is now likely to have a stable government through to the end of the decade.
The election was doubleplus-good in the sense that it didn’t result in a Liberal minority that would depend on New Democrat support. Not that the NDP today practises the kind of firebrand socialism it did 40 years ago, but Thomas Mulcair as kingmaker would have added a healthy dose of instability, especially in the eyes of international investors.
Mulcair had pledged to withdraw Canada from the Trans-Pacific Partnership trade deal, and, theoretically, could have pressured the Liberals (who ofcially support the pact) to bow out.
Also in the it-could-havebeen-worse category, the Bloc Québécois made some gains but fell short of ofcial party status. At least at the federal level, we can expect the separatist threat to remain muted.
From a risk perspective, there is little in the election outcome that should derail the economy or financial markets. But what about the economic measures Trudeau has promised?
His pledge to reinvigorate Canada’s position against climate change and environmental degradation will cause some concern in the energy sector. We might get a better sense of the ferocity of this pledge in December, with the global climate change summit in Paris.
On the other hand, while Trudeau has endorsed capand-trade schemes, he’s been moderate on greenhouse-gas emission targets and selectively supportive of pipelines. And the fact is, federal greenness discouraging new investment should be the least of oil investors’ worries. Just being in a situation to make new investment, regulations or no, would be a relief.
Then there’s the Liberal commitment to tax cuts for the middle class and deficitfunded investment in infrastructure. Let’s take the middle-class tax cuts as a wash given the planned tax hikes for the one-per-centers, although there might be a very mild stimulative effect on consumer spending.
That leaves infrastructure, to which the Liberals plan to devote billions over the next decade. We’ve already seen shares in infrastructure players such as SNC-Lavalin Group Inc. and Aecon Group Inc. rise in anticipation, though that might be jumping the gun. The budget will provide more insight. Outside of creating jobs on the ground, more infrastructure spending should help stimulate the broader economy in the longer term. We’ve had years of monetary stimulus, which so far has proven largely unable to kick-start an economy mired in growth hovering around zero. Now the new government plans to step up and provide fiscal stimulus.
The good part is that the benefits of new infrastructure should be broadly felt, at least in theory, in the sense that businesses will be more efcient and more people will get to work on time. The bad part is that such projects can take years to complete or to reap the benefits.
And, not to be cynical about it, one has to wonder how evenly spending will be distributed, given that the election has shifted the balance of regional representation in government firmly to the east.
But the big take-away from Trudeau’s fiscal plan is its modesty. Yes, Canada will be running deficits, but government finances are in good shape (thank you, Stephen Harper) and we can probably afford to borrow for a while anyway.
All in all, this isn’t anywhere near the course correction that Japan, say, has undertaken. This version of Trudeaunomics isn’t Abenomics, not by a long shot.