Loonie will fall if Trudeau wins majority in federal election vote: Purpose CIO
If Justin Trudeau outperforms the polls on Sept. 20 and secures a majority mandate in Canada’s 44th general election, Greg Taylor warns the loonie will suffer.
“I definitely think if the Liberals get a majority, the Canadian dollar will drop, though I’m not sure if it will be an aggressive drop or just a marginal drop,” Taylor, chief investment officer at Purpose Investments, said in an interview.
In that scenario, he argues Liberal plans to move more aggressively towards a low-carbon economy and impose new taxes on the banking sector would spawn a widespread market selloff.
“It would be structural,” Taylor said. “The banks would go down in that scenario and the energy stocks would go down as well, that is 40 per cent of the market already. If the Liberals got a majority, I think the odds of tax increases and specifically capital gains tax increases would probably be on the table and that is definitely not market-friendly.”
Canadian financial stocks "are certainly not discounting a Liberal majority today, so you could see a bit of a bump in the road there," Lesley Marks, chief investment officer for equities at Mackenzie Investments, said in an interview. "But then what you would likely see is some capital allocation decision-making that would probably make a shift - whether in the form of stock buybacks or dividend or acquisition - in order to respond to a change in corporate taxes."
In other words, should the Liberals win enough seats to impose their promised three per cent tax on banking profits in excess of $1 billion, Marks said bank stocks could face some short-term pressure, but "they would start to take that into account in their planning for the future."
As for the loonie, Shaun Osborne, managing director and chief foreign exchange strategist with Scotiabank, agreed “you could see the Canadian dollar under some sort of mild pressure” in the event of a Liberal victory, even if the governing party ends up with a weakened minority. That pressure would only last for “maybe an hour or so,” he stressed.
“Canadian federal elections generally sort of wash right over the Canadian dollar,” Osborne said. “There is very little sign of any increased volatility in the exchange rate around elections [and] that goes back to the late 1990s.”
Yet there is some reason to believe this election cycle will be different, as Marks noted "one other nuance we should be mindful of is the role of the mail-in vote."
"That means we actually may not have an outcome on Monday night and in that context, currency markets can be very reactive, so not having that certainty right away could create a little bit of volatility around the currency," she said.
Should the Conservative Party emerge victorious, Taylor said energy stocks in particular would probably see the most benefit regardless of whether Erin O’Toole ends up leading a minority or majority government “because oil and gas companies would definitely see more friendly regulation coming at them.” The Canadian dollar would also “rally on the basis that [the Conservatives] have at least some plan to address the deficit,” Taylor said.
Osborne was quick to pour cold water on that potential outcome, noting any rally in the loonie resulting from a Tory victory would be even more short-lived than the “hour or so” of pressure the currency might experience following a Liberal win.
“I wouldn’t even put a timeline on it, but a very brief sort of knee-jerk or snap reaction to headlines that you sometimes get in the markets could happen,” Osborne said, adding the term “momentary” was a fair way of characterizing such a reaction.
Longer-term impacts of a Tory victory would more likely be found in government bond markets, according to Earl Davis, head of fixed income and money markets for BMO Global Asset Management.
“What is interesting and where there could be implications would not be in the federal debt, but in the provincial debt,” Davis said in an interview.
“If you do get the Conservatives in and they end up doubling the transfers for health, that just means the provinces have to raise less debt. But if you’re looking at it from a spread basis, you’re not talking about 10 or 20 basis points, it is more like one or two.”
Indeed, Davis added he has “been watching markets since 1994 and this election is one of those with probably the least implications for fixed income.”
Rebekah Young, Scotiabank’s director of fiscal and provincial economics, said in a Sept. 13 report that the “different approaches to provinces and sectors could have some bearing” on how markets react to the election results.
“The Conservatives would front-load transfers to provinces [$9 billion in the 2022 calendar year], providing some balance sheet relief to oil-producing provinces, along with a six per cent riser in the Canada Health Transfer,” she wrote. However, “that would only have a material impact beyond its first mandate.”
Under a section titled “Nothing to see here,” Young effectively summarized the prevailing Bay Street view towards the Sept. 20 vote: “Political pundits may have plenty to chew on in the coming weeks (and potentially months), but markets will likely sit on the sidelines until the dust settles.”