Minority Report: Takeaways from Canada’s Federal Election
Author: Mike Archibald
October 22, 2019
Justin Trudeau and the Liberal party won a minority government in Canada’s federal election this week. Here are three thoughts on how the result may impact financial markets in the days and weeks ahead.
Tough night for the energy sector
The key question now is whether the Liberals decide to try and form a coalition with the NDP or Bloc Québécois, or if they look to work more on an issue-by-issue basis. Pipeline construction will continue to remain a hot topic, as the Liberal government wants to get it passed to help Western Canada, but by continuing to pursue that project, they may alienate the NDP and risk losing their support on other legislative issues. The energy sector also didn’t get any favours from the Bloc Québécois’ dramatic increase in seat count and return to official party status. The BQ is against further pipeline expansion, but said it will not form a coalition, choosing instead to vote on an issue-by-issue basis with support contingent on benefits to Quebec.
More spending, larger deficits
If a Liberal and NDP coalition holds, spending is likely to increase meaningfully and deficits are likely to get larger in the next two years. Canadians should expect budget deficits to continue to increase over the medium term, with tax increases at the top end of the income distribution to pay for the incremental spending. Higher deficits should point to a modestly weaker loonie over the medium term.
Carbon pricing is here to stay
Climate change policies will continue to be a major focus for the Canadian economy, with the Liberals and NDP pushing this as a major agenda item and continuing to proceed with carbon tax increases, which will affect Canadian consumers to a greater degree in the coming years. The Conservatives clearly didn’t pass the test with voters on having a clear and decisive climate plan that would swing voters in the middle towards the right.
Overall, investors should expect limited stock market reaction on this outcome, but energy stocks won’t get any relief bounce and could see a further deterioration in sentiment towards the space.
Mike Archibald is an Associate Portfolio Manager at AGF Investments Inc. He is a regular contributor to AGF Perspectives.
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