Canadian Election is a Toss Up: Three Investment Impacts to Consider
A minority government scenario appears most likely. It’s too close to call according to most polls. The combination of a minority government is also unclear. Markets do not like uncertainty and uncertainty is the most likely outcome. My expectation is in line with that of www.338Canada.com suggesting a statistical tie with as many as 50 seats too close to call. But a Liberal-NDP coalition, a very possible outcome, would take the LEFT into a majority position, but likely for a short election cycle. We’ll be voting again in 2021.
While this may appeal to those where the environment is the number one issue, Elizabeth May will tell you that it’s not enough. She’s right by the way. Governments can’t move the needle enough on the environment if China and others don’t get off coal yesterday. But we also cannot go cold turkey on the oil sands either, so May and Singh are not very practical in their policies either. If the LEFT comes hard on Alberta-Sask energy production, we would not be surprised to see increasing talk of an ABEXIT referendum. Not because Alberta wants to leave Canada like Quebec once did, but because Alberta will be economically devastated if the move to clean energy is not done with the economics fully thought out. I believe the future is one of renewables and clean energy and I support this shift, and yes, it should have started 30 years ago, but it still needs to be done with balance. The far LEFT wants it shut down tomorrow, and that simply cannot happen. The victim here is the 16% of the S&P TSX that is the energy sector. This was over 30% when WTI was north of $100 over the past decade. Should Elizabeth Warren become president and somehow bans fracking, WTI would move back above $100 again, as all of the US energy renaissance in recent years gets shut in. Guess who Russia will back in the next US election? WCS, would not participate much in that lift to energy prices if we do not get TMX built. I don’t believe it will get built under a LEFT coalition government. The NDP will not allow it in order to support the Liberals.
Should the BQ and Conservatives somehow form government, the BQ will not allow and energy corridor to the East, but odds that TMX gets built increases significantly once Bill 69 gets repealed. The outcome for the energy sector is significant.
Globally, the polarization of politics continues to escalate. More extreme right and left leaning polices are playing out in populist movements. As things stand right now, I see Elizabeth Warren as the next US president and that will have major implications for financial markets in the coming years. Perhaps like no other time in history, election outcomes will increasingly shape your retirement saving as policies tact to more extreme places.
The Most Likely Investment Outcomes
Majority Conservative government is most positive for energy, but least likely to happen. Energy in Canada continues to underperform the world and in any minority government, foreign investment will continue to go elsewhere. What CEO in their right mind would make such an uncertain bet? S&P TSX Energy sector ETF (XEG) has underperformed the US energy sector massively in the past decade. WE NEED PIPELINES TO CHANGE THIS TREND. Bill C-69 will ensure this trend continues.
The knock on to this outcome is that the C$ is a victim and slips below 70 cents (above 1.4285) over the next few years. Snowbirds, buy your US dollars today (near 1.31) if you have not already.
The final impact from an investing standpoint are (relative) interest rates. Our final chart shows that it is not so much who is running Canada, but what Canada does relative to the US. And the US is in a far worse fiscal mess than Canada. Make no mistake though, the government debt federally and provincially has Canada up there with some of the worst sovereign debt problems globally at over 90% debt-to-GDP. We are in for a future of debt monetization and that likely keeps interest rates low for a while. The killer to the massive debt the world owes is a return of inflation. And the more LEFT the world shifts politically, the greater the risk of inflation expectations rising. Modern monetary theory and universal basic incomes are inflationary policies.
Come out to my Fall roadshow moving across the county over the next month. I’ll show you the important roll fixed-income plays in your portfolio and some ideas how to deal with the low rate environment and the potential inflation in the future. I’ll also elaborate on US Fed policy and how that may swing your portfolios around heading into the 2020 US elections.
Click here to register for free and as always we ask for volunteer donations to one of our two favourite charities. Children’s cancer research at the Sick Kids Hospital and Alzheimer’s and dementia research at the Baycrest Hospital.