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Avery Shenfeld, chief economist at CIBC.
Markets tend to react to surprises and don’t tend to do much but shrug their shoulders when they get news that they were already expecting. So in this case, this election outcome could hardly have been better anticipated. The pollsters, to give them credit, had their estimates of seat counts essentially right on, and we ended up with a Parliament that, although it’s a new Parliament, looks very much like the old Parliament in terms of the distribution of seats. So market reactions are going to be fairly tame given that there’s really no surprise, at least on the day after the election, to think about.
For equity markets, the number one agenda item on the government is keeping Covid under control and getting us through what we hope is the last wave of the pandemic. At the end of the day, the Covid pandemic is still the greatest risk to most corporate sectors; earnings. There are some sectors that benefited from the virus, but for the most part, we need to get this under control. And therefore, the outlook is really contingent on the government continuing to do a reasonably good job, as they have so far, in keeping Canada at the lower end of the Covid scale relative to some other countries. So it’s continuing to press ahead with promoting vaccination, particularly now for children, as is expected soon, getting the economy essentially past this Covid wave.
There are some individual sectors where the government had some proposals on the tax side or the regulatory side. Again, because this election outcome was largely anticipated, some of that would’ve already been priced into equities in those specific sectors, and I think overall, the market will be waiting to see the specifics of some of these proposals, because when you do have a minority government, the election platform doesn’t exactly end up matching what ultimately gets enacted.
We didn’t see much volatility in the Canadian dollar during the election campaign, and that’s not unusual. We look back at previous elections and it was very hard to pick out any recent election in which the Canadian dollar went on a course of its own, that wasn’t tied to really general movements in its counterpart, the U.S. dollar. It appears to be the same in this particular case. Not only was the election result anticipated, but some of the big items that tend to move the exchange rate — major shifts, for example, in budget deficit policies or very large-scale swings in tax policy. Because that’s not the case in this election and isn’t expected to be the case in the next couple of years, we don’t really expect to see the Canadian dollar move in response to this election outcome.
Given the size of the budget deficit since the pandemic hit and the significant upturn in federal debt-to-GDP ratios, it’s a bit surprising that no major party made the deficit or fighting the deficit a serious part of their campaign. We did have the Conservatives pledge, for example, to balance the budget in 10 years. But if you look at the budget projections that the Liberals had in their last budget, which do only go out five years, we were pretty close to the same path that you would be on if you intended to balance the budget in a decade.
During the campaign, we did have the Liberals come out with a proposal that was then costed by the Parliamentary Budget Office, an independent observer on these things. And essentially, what the Liberals did is they did raise spending, they offset some of that with some tax-hike proposals, and the net result is that track of the deficit over the next few years isn’t really that much changed from where it looked at budget time back in April. We’d seen some improvements in the projected path of deficits because the economy has recovered a little faster than expected, and the room that those improvements created essentially has now been offset by new measures during the election.
Overall, bond markets seem to be taking these large deficits in stride, perhaps because Canada is in a beauty contest with other countries, none of which look particularly good in terms of fiscal results. Virtually all major economies have let their budget deficits and debt ratios blow up. And given how low interest rates currently are, bond markets are comfortable that the debt service burden on the federal government isn’t at this point looking too onerous. So we don’t expect to see a lot of implications for fixed income markets. There are some subtle nuances here that could come up due to very specific measures. But overall, we didn’t expect to see a general shift in bond yields coming out of this election.
What there has been since the last election under a minority government is a little bit of a swing to the left, politically. Now that’s not just a Canadian story. Of course, it was matched in the U.S. with the Biden victory. We do have a group of parties that seem to be of a common mind on some key issues, including the need for addressing climate change. So for investors, it means that some of the sectors of the economy that actually benefit from the climate change spending, I think, are ones to continue to watch. We’ve seen a lot of money pouring into funds that invest in green initiatives, and I suspect that that trend is going to continue, not just over the net life of this Parliament, but perhaps even over the next decade as governments around the world do put money where their mouth is, in terms of funding initiatives for green energy, for carbon capture and storage, promoting electric vehicles. So segments of the equity market that can benefit from that spending are ones to still watch.