Larry Berman: The election and your portfolio
Probably not much is the answer. You should rarely adjust your long-term goals for short-term noise. However, to the extent that the NDP force the Liberals to move more to the left on tax increases (new revenues), it could matter for some that are overweight Canadian income focused portfolios. As it stands now, if you believe the pollsters, Canada338 aggregates and weights polls and estimates what that may mean based on past patterns and demographics of each riding.
As we have come to understand, polling estimates have been poor forecasters for several years now dating back to BREXIT and the Trump victory in 2016. Nevertheless, the projection is for a Liberal minority. In 2019 the CPC won the national popular vote by 1.22 per cent (34.34 per cent vs. 33.12 per cent), but lost the election. This time around, the NDP is polling closer to their 2015 results and looks to have more influence.
According to the 338Canada / Qc125 model has thus far covered eight general elections in Canada (one federal and seven provincial). In total, 926 electoral districts were projected by the model and has correctly identified the winner in 818 districts - a success rate of 88 per cent. Here is the complete breakdown of safe, likely, leaning and toss up districts. The correct winner was identified in 88.3 per cent of all districts of these five general elections. Among the 108 remaining districts, 62 of the winners (6.7 per cent) obtained a share of the vote that was within the projection's margin of error (moe). Only 46 districts (five per cent) were complete misses. As we often see, it likely comes down to Ontario where 38 seats are leaning or toss ups.
The Liberal platform is somewhat vague on specific details except for a tax on big banks and the top one per cent of income earners. These bullets are directly from their on line platform:
- Increased taxes on the top one per cent of earners so that middle class people could get a break.
- Closed tax loopholes used predominantly by wealthy individuals and companies such as the stock option deduction.
- Modernized the tax system to recognize the growing importance of digital tech giants and made sure Canadian companies are able to compete on an equal basis with their competitors online.
- Helped to set a global minimum corporate tax.
But the NDP (like the progressive part of the Democrats in the US) are in a tax the rich mood not unlike the progressive part of the Democrats in the US.
- Increase Capital Gains Inclusion Rate to 75 percentage points
- Increase Top Marginal Rate to 35 percentage points
- Wealth Tax
- Increase Corporate Income Tax Rate by three percentage points
- Eliminate stock option loopholes
- Eliminate meals and entertainment deduction for large businesses
A weak Liberal minority that needs full NDP support will likely see a real risk that cap gains inclusion rate moves to 75 per cent. We could see some yearend tax selling on Canadian banks that have the double whammy of higher taxes on profits and a desire for investors to crystalize capital gains at a lower rate.
In the US, Biden is looking to increase corp taxes too that would take five per cent off EPS for the S&P 500 and we could see a similar (but slightly smaller) impact on the S&P TSX forward earnings based on the Liberal and NDP tax increases.
From a global perspective, investors who consider Canada would likely see it as a non event given the likely continuation of a minority left leaning government. For those that have been calling for Canadian real estate to crash, there are some measures to curb speculation. And housing affordability is a growing political issue. But that is more a central bank issue inflating asset prices with easy money policies and not a political outcome. It’s also a supply issue and more supply of housing should limit price increases. Liberal immigration patterns likely continue to boost demand for real estate as population increases. Don’t run out and rebalance your portfolios, but if you are overweight Canada income stocks like banks, you may want to consider more non-North American exposure in registered accounts where the dividend tax credit is not a factor.
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