Global Perspective – Canada’s snap elections – agenda uncertainty lifted

Eylem Senyuz 

Senior Global Macro Strategist

Truist Advisory Services, Inc.

Summary

In August, Justin Trudeau, the Prime Minister and leader of Canada’s Liberal Party, called a snap election two years ahead of schedule. Trudeau had mistakenly assumed that his government’s pandemic response would fetch him a majority in parliament. However, the surprise election did not deliver any surprises; the status quo has not changed.

Canada’s central bank is on track to lift its policy rates ahead of many other developed markets central banks including the U.S. Federal Reserve. We expect the Canadian dollar to stay strong with inflows attracted by higher yields. Further, Canada appears to be developing into a target for investors previously attracted by EM due to inflation concerns. This is in reaction to political uncertainties in commodity-producing countries and China's dominance in EM indices forcing these investors to look elsewhere.

What happened

Trudeau’s gamble didn’t pay off

In August, Justin Trudeau, the Prime Minister and leader of Canada’s Liberal Party, called a snap election two years ahead of schedule. Trudeau had mistakenly assumed that his government’s pandemic response would fetch him a majority in parliament with a mandate to deal with climate change, social welfare, and public healthcare in Canada. His opportunistic power grab backfired, and according to unofficial results, his Liberal Party fell short of 170 seats required for a majority, gaining only one additional seat from the previous election in 2019. The New Democrats are expected to continue to support Trudeau in his third consecutive mandate, helping to form a minority government. In short, the surprise election did not deliver any surprises; the status quo has not changed.

Climate change & more social spending funded by higher taxes

Trudeau's main policy agenda is expected to be climate change. The Canadian hydrocarbon sector could lose oil and gas subsidies and related public financing. New regulations and policies are likely to increase operating expenses for carbon-emission-heavy processes such as in Canada’s oil sands. Retraining for green jobs, especially in high unemployment provinces could help transition workers from the hydrocarbon sector. The minority government has a very ambitious social agenda. To fund it, the new government plans to increase taxes on financial institutions and sectors that benefited from the pandemic. Moreover, the New Democrat Party, which supports Trudeau's minority government, may push for a wealth tax for high net worth individuals. Finding support for social programs funded by fiscal expansion should be relatively easy, but introducing a plethora of new taxes may prove complicated.

Bottom line

We prefer the U.S. markets over the developed markets, in which Canada is a relatively small exposure. However, with the election in the rear-view mirror, optimism is returning to Canada.

Emerging Markets (EM) were commonly the destination for investors worried about higher inflation, mainly induced by higher input prices. However, political uncertainties in commodity producing countries and China's dominance in EM indices has forced these investors to look elsewhere. We see Canada becoming a target for those investors that are seeking a better hedge against inflation and are avoiding EM.

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