Markets had priced in likelihood of his departure warmly, but lengthy prorogation could introduce uncertainty
In the leadup to Prime Minister Justin Trudeau’s announced resignation as Liberal Party Leader, markets had largely priced in his departure. Canadian equities — specifically energy stocks — picked up some momentum. The weak Canadian dollar appeared to be regaining a bit of value against the Canadian dollar and investors began to price in the likelihood of a spring election where, if current polls are to be believed, the Conservative Party would probably win in a landslide. Then the news broke that Parliament would be prorogued until March 24th.
The extended prorogation of parliament has introduced a new wave uncertainty for markets. Crucially, it leaves Canada without a sitting parliament for the first two months of the incoming Donald Trump administration. It leaves open questions of who the next Liberal leader will be and if the NDP will walk back their promise to vote for a non-confidence motion when parliament next sits. Crucially, it leaves advisors needing to make sense of this uncertainty for their clients.
“I think the biggest problem we're having now is that there's a lot of uncertainty around the timing,” says Greg Taylor, Chief Investment Officer at Purpose Investments. “I think the fact that it goes until March 24th is not going to be looked at as great, because we’re arguably going to be in a state where there is no one running the country for the first two months of President Trump’s term. I think that’s why we’ve seen the Canadian dollar give back a lot of that initial gain that it had.”
While Taylor believes an eventual election and a likely win by the Conservative Party will be greeted warmly by Canadian equity markets, he notes the simple fact that markets hate uncertainty and the prorogation has introduced some uncertainty for investors.
That uncertainty will likely be most apparent in currency markets, Taylor explains, as fixed income markets will probably remain on track through the Bank of Canada’s commitment to continued rate cuts. As we get more clarity over the coming months, equity markets may begin to price in a likely Tory government, with energy stocks as the probable beneficiary.
“It’s important to realize that Canadian energy is up over 80 per cent in the last three years,” says David Szybunka, Senior Portfolio Manager & Managing Director of the energy team at Canoe Financial. “Even with Justin, with not great energy policy, Canadian energy stocks have done pretty well if you’re in the right areas.”
Szybunka explains that Canadian energy stocks have benefitted from a strong commodity cycle as well as the strengthening of company financials. These companies have become more profitable despite a less-accommodating government. Moreover, they’ve benefitted from the weak Canadian dollar, resulting in massive margins on the export market. The end of Justin Trudeau’s tenure as Prime Minister could remove the headwind of government policy from the energy sector. The next government, moreover, could offer more accommodating policy for Canadian energy companies.
That tailwind, however, comes with the caveats of an election and this extended prorogation. Szybunka explains that the US is already on course to welcome greater capital flows under the incoming Donald Trump administration. If the polls are correct and the Conservatives win the next Canadian election, we could see more global capital start to flow to Canadian energy stocks. However, that is still not a certainty.
Despite those possible tailwinds for Canadian energy stocks Trudeau’s resignation leaves Canada with a leadership vacuum at a possibly crucial time for this country’s relationship with the United States. Given the threat of significant tariffs under a new Trump administration, Taylor believes there is real risk to the Canadian economy now.
“I think Trump is loving this and smells blood,” Taylor says. “He’s looking for early wins in his first 100 days in office, so he’s got to be looking at the turmoil up here, thinking we’re in a weaker spot and that he can do some damage. That’s probably why stocks and the dollar might be more in limbo for the next little bit.”
It’s on advisors to make sense of this move and its market impacts for their clients now. As they do so, they’ll have to highlight just how much uncertainty is still out there. They can, however, still highlight some of the more positive aspects that could emerge from the eventual settling out of our ongoing political crisis. Taylor notes that the weakness we see now in the Canadian dollar could offer some opportunity for upside in CAD assets once that clarity comes and all the bad news starts to turn in a different direction.
“You have to look at the light at the end of the tunnel. While we’ve got a lot of uncertainty right now, once we get through this things could start to turn around and become much better,” Taylor says.
