Equity sectors to watch after Liberal win

A government that looks almost exactly like the previous one is unlikely to roil markets, CIBC’s chief economist says. But certain regulated industries and green energy companies could be affected if platform promises are implemented.

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“There are individual sectors where the government had some proposals on the tax side or the regulatory side,” CIBC’s Avery Shenfeld said in an interview on Tuesday. “Because this election outcome was largely anticipated, some of that would’ve already been priced into equities in those specific sectors.”

Justin Trudeau’s Liberals pledged to raise the corporate income tax rate for banks and insurance companies, and those institutions would also contribute to a Canada Dividend Fund. Together, the two measures would raise roughly $10 billion over four years.

The Liberals also campaigned to review the tax treatment of large corporate owners of residential properties like REITs and implement policies to “curb excessive profits.”

“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,” Shenfeld said.

In a research note on Tuesday, Bank of Montreal chief economist Douglas Porter said the new minority government could result in higher taxes. He pointed to the Liberal policy for banks and insurance companies, and NDP tax pledges for corporations, top earners and the capital gains inclusion rate.

“It appears that these are areas that the Liberals potentially may be willing to go in order to garner support,” Porter wrote. “In fact, it’s notable that tax changes are an area where the Liberals and NDP see plenty of overlap, and one could argue that the risk of tax increases is higher in this minority mandate that it was in the last.”

Shenfeld said the new Parliament’s “swing to the left” could benefit some companies focused on addressing climate change.

“We’ve seen a lot of money pouring into funds that invest in green initiatives, and I suspect that trend is going to continue,” he said, as more governments live up to climate goals and fund initiatives promoting green energy, carbon capture and storage, and electric vehicles.

“Segments of the equity market that can benefit from that spending are ones to still watch,” he said.

While the Liberal platform didn’t include a plan to eliminate the deficit, bond markets aren’t worried, Shenfeld said, and he doesn’t expect the outcome to move yields.

“Canada is in a beauty contest with other countries, none of which look particularly good in terms of fiscal results,” he said.

“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.”

Rebekah Young, director of fiscal and provincial economics with Scotiabank Economics, wrote in a research note on Tuesday that “some degree of fiscal activism” had been priced into Canadian sovereign bonds ahead of the vote, since the Conservative platform wasn’t vastly different in its debt reduction plan.

In a “search-for-yield environment” where about US$17 trillion in sovereign bonds are trading in negative territory, Canadian spreads have remained tight and are still attractive with their positive yields, she said.

As for currency markets, Shenfeld doesn’t expect any drama regarding the loonie. The election result was anticipated and likely won’t lead to the kind of major shifts in budget deficits or tax policy that move exchange rates.

“We don’t really expect to see the Canadian dollar move in response to this election outcome,” he said.

The loonie closed at 77.95 cents US on Monday, and was trading around 78 cents as of 1:30 pm ET.

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