Today’s Headlines: Political Transition in Canada

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Today’s Headlines: Political Transition in Canada
October 27, 2015

Another Trudeau Becomes Prime Minister

We are so bombarded by news about the US presidential election that is still over a year away that it’s easy to overlook important elections taking place in other parts of the world. One such vote was held last week by our neighbors to the North, and the result was dramatic. Canada changed course abruptly by electing Justin Trudeau as Prime Minister, ousting current PM Stephen Harper, who was running for a fourth term.

The son of iconic former PM Pierre Trudeau and his Liberal Party will take the reins of power after a long run by Harper's Conservative Party. The Liberals won 184 seats in Parliament, giving them an outright majority of 54%. The Conservatives lost 67 seats to just 99 (29%), and the New Democratic Party (NDP) dropped 59 seats to a total of 44 (13%). Liberals were so successful that they even claimed a majority of seats in separatist-leaning Quebec. The scale of this shellacking is all the more impressive when one considers that in 2011, the Liberal party had its worst ever electoral showing — claiming just 34 seats in Canada’s 338 seat House of Commons.

All in all, it was quite a night for the Libs, who appear now to have a clear mandate in Canada. What are they likely to do with this mandate, and how might that affect us in America?

Deficit Spending Is Back

Paul Krugman of the New York Times may have phrased it best in a recent column title, "Keynes comes to Canada." Trudeau has already pledged to double spending on infrastructure and run deficit spending in the short term (approximately $7.7 billion in annual deficits for three years) in order to stimulate the economy. Taxes will be raised on those earning more than $200,000 in order to cut taxes for the middle class.

It's a return to classic tax-and-spend liberalism in most respects... or is it? Trudeau has pledged to keep deficit spending modest and balance the budget by 2020. By pitching deficit spending as an investment in infrastructure, Trudeau cleverly implied that Canadians would be getting tangible value for their tax dollars rather than just red ink. Of course, that depends on where the funds are spent — but for now, we must give Trudeau the benefit of the doubt. Presumably, more detailed spending plans will be announced before long.

We'll see if they do a better job than the US did with a stimulus package, which was aimed more at "shovel-ready" speed than true infrastructure investment. As a result, it had the feel of money being thrown at the wall hoping a sufficient amount would stick and provide jobs. Arguably, we didn't get much infrastructure value for the money spent.

Good Timing for Infrastructure Investment

It's important to note that Harper's Conservatives also embarked on deficit spending out of necessity in 2009, with larger deficits than in Trudeau's proposed plan. However, the situation is significantly different today.

In 2009, Canadian debt was a great deal for investors, given the country's quick recovery from the recession and a relatively stable banking system compared to the chaos in the US and other countries. With the recent hits in commodities and oil slowing the domestic economy, Canadian debt is not as attractive to investors as it was in Harper's day. Yields on 30-year inflation-protected bonds are below 1%. Even so, Jonathan Lemco, senior analyst at Vanguard Group, Inc., suggests that Trudeau will have little problems funding his debt-based program thanks to Canada's AAA rating and the relatively small proposed deficit amounts.

According to Krugman, Canada can borrow for 10 years at a rate of around 1.5%. External economic stimulus through greater commodity exports doesn't seem to be coming from abroad anytime soon given China's slowdown, and the oil wars are likely to continue in the short term. Given these conditions, it seems like the right time to invest in infrastructure. Apparently, Canadian voters overwhelmingly agree.

Potential US Benefits

While the vast majority of stimulus spending will benefit Canadian vendors of goods and services, it stands to reason that the US will gain some spillover benefit. Canada is currently America's largest trading partner. According to International Trade data from the Census Bureau, in 2014, we exported $312.4 billion in goods to Canada while importing $347.8 billion for $660.2 billion in total trade. Through August 2015, the collective US-Canada trade is just under $390 billion.

With spending focused on infrastructure, the outlook should improve for construction firms and engineering firms that do business in Canada and the companies that supply them, whether they are based in Canada or elsewhere.

On broader scales, the Trudeau administration will be more in line with the Obama administration on several key economic policy points. The Liberals are expected to back the Trans-Pacific Partnership (TPP) trade agreement that will reduce tariffs and further boost collective trade. Renewable energy is already big in Canada, and Trudeau has promised green spending at around $6 billion over four years and $20 billion over ten years.

The Market Approves So Far

So far, markets have reacted positively to the Canadian election — or more to the point, they have not reacted negatively. The Canadian dollar (aka the "loonie" named for the loon on the back of the coin) has remained stable and the S&P/Toronto Stock Exchange (TSX) finished up for the week. All signs so far point to a relatively smooth transition.

This is in part due to the sweeping victory by the Liberals. Markets hate uncertainty, and with majority control, it will be easier to forecast the Liberals' agenda and react in a predictive fashion. Contrast that to the US, where we've devolved into a system in which few things are certain anymore and the focus is on how to stop things instead of accomplish them.

The Takeaway

While multiple reasons have been given for Harper's fall, the economy was not considered one of them. Harper was given well-deserved credit for skillfully steering Canada's economy throughout the 2008 worldwide economic crisis. Despite that, voters appear ready for a more progressive, free-spending approach.

There is not much US downside to increased Canadian spending. If you want to take advantage of this new environment, stay abreast of detailed spending plans as they are announced. Find out which companies are likely to benefit based on where the spending is eventually directed, and then assess the valuation of their stocks to find a value buy. In short, follow the money and look for bargains.

What is going on in Canada might mirror the future of the US, if you can imagine the Democrats holding the White House and regaining the House and Senate in 2016. We leave it to your opinion as to whether that's good or bad for America.

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Daniel | 10.27.15 @ 22:00
Interesting information, will have to wait to see how this impacts / leads the US actions
Carla | 10.27.15 @ 22:01
I saw a lot of talk of these elections on facebook from my Canadian friends. It was very interesting to watch.
Steffanie | 10.27.15 @ 22:01
Not sure this is a good thing
Erin | 10.27.15 @ 22:04
I hope they have the government they want. Hopefully it works well for them.
Andrea | 10.27.15 @ 22:04
Curious to know the outcome.
Kamie | 10.27.15 @ 22:06
This is something all over my fb feed
Victor | 10.27.15 @ 22:49
Great article, I do have contradicting feeling about what could happen with this
Bobbie | 10.27.15 @ 22:50
I still have a hard time comprehending Canada has political issues, it is so rarely reports in US news.
Amanda | 10.27.15 @ 22:54
Have to agree with another commenter, I rarely hear anything about their politics that it's hard to think about them. But thanks for the information, be interesting on seeing the results of all this.
$commenter.renderDisplayableName() | 12.04.20 @ 04:43