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So, another minority Liberal government. What now?

Close up image of Justin Trudeau

Prime Minister Justin Trudeau celebrates another victory but did not get the Liberal majority government he had hoped for when calling the snap election. Despite a few seats changing colours, the balance of power in the House of Commons remains largely unchanged.

What does this mean for the government? For markets? And your portfolio?  

In Parliament… Nothing much

Decision making will still require non-Liberal support. The Prime Minister will continue to rely on  confidence-and-supply agreements with at least one other party (those who likely see eye-to-eye with the Liberals on some legislation or principles, likely the NDP and/or the Bloc Quebecois) to get things done. The Conservative Party of Canada remains the official opposition.

More certainty, more of the same

With the outcome closely mimicking the pre-election situation, it’s likely we will have more of the same. From a market perspective, the election was widely seen as a non-event. Canadian elections have historically not been major market movers.

Although volatility did spike prior to the election on Monday, this was far more a result of investors dealing with the potential insolvency of Chinese real estate developer, China Evergrande Group (and the broader economic slowdown in China), coupled with rumblings that the U.S. Federal Reserve is looking to dial back stimulus ahead of September’s Federal Open Market Committee meeting.

While a minority government was widely expected by most, in the weeks leading up to the election it was at times uncertain as to whether it would be minority red or minority blue. In reviewing key campaign messages about climate change, housing, and taxation, either scenario would have come with modestly different implications for different industries and sectors – namely financials, energy, and real estate. Given the result, there was no major shift in expectations, but as always, we will continue to analyze how the Federal government will execute its plans and adjust as needed.

Conditions will likely remain supportive

The Liberal win preserves the status quo and likely ensures that the fiscal support that has propped up the Canadian economy throughout the pandemic is likely to continue to support the recovery. This is coupled with the Bank of Canada’s guidance that it will hold the target for the overnight rate at 0.25% until economic slack is absorbed and 2% inflation is sustainably achieved (which is expected in the second half of 2022 according to the Bank’s current expectations).

Correspondingly, we remain overweight equities relative to fixed income, albeit in a diminishing fashion. While markets already reflect much of the optimism regarding the recovery, ongoing growth will likely endure as vaccination efforts progress globally and in areas with high vaccination rates, COVID-19 becomes endemic, rather than pandemic. Within our equity allocation, we remain overweight the developed market economies versus the emerging markets as vaccination rates remain quite lopsided and Chinese market issues persist.

For more information about this event, please contact your MD Advisor*.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.

About the Author

Richard Schmidt, CFA, is an Associate Portfolio Manager with the Multi-Asset Management Team of 1832 Asset Management L.P. His primary focus is MD’s North American equity funds and pools.

Profile Photo of Richard Schmidt