October 29, 2020
What does the U.S. election mean for Canadian investors?
This year has already been one of the most volatile periods on record for the financial markets. Now, with the upcoming U.S. presidential election, there’s potential for yet another wave of unpredictability.
And, for Canadian investors, there’s an added level of concern: trying to understand how the outcome might impact their investments – and the entire economy, north of the border.
“I think Joe Biden would be a lot more hospitable to Canada,” says Bill Onslow, Vice-President of U.S. Equities at Addenda Capital. “The relationship between Prime Minister Justin Trudeau and U.S. President Donald Trump has been quite contentious at times. We have a new trade deal in place, which is a good thing, but that hasn't stopped Donald Trump from imposing tariffs, as we recently saw with aluminum and with steel before that.”
But – like most aspects of this election – for every check in one column, there’s a counterpoint to consider:
“One of the biggest losers if the Democrats win is likely to be energy stocks,” adds Onslow. “They've received favorable tax treatment under Donald Trump. Joe Biden, on the other hand, may work to hold Canadian energy companies accountable for their environmental obligations. He's already been quite a vocal advocate of cancelling the keystone pipeline.”
What are the short-term impacts versus the long-term outlook?
In Onslow’s opinion, with the platforms of the two candidates being so “radically different” – especially on big policy issues, like the environment, taxation, healthcare and trade – there will certainly be some short-term impacts following the election.
“The biggest risk is volatility – and that increases a lot if the result turns out to be closer than the polls would indicate now, and we get into a contested election scenario,” he says.
By all counts, a contested result is the worst-case scenario. The only real comparable example is the 2000 U.S. election: it required multiple vote recounts in Florida, and ultimately reached the U.S. Supreme Court, before Democratic candidate Al Gore conceded defeat to George W. Bush on December 13. During that time of uncertainty, the effect on markets was close to a 10% correction. They did recover, however, once a decision was reached.
If the election outcome reflects current polling numbers (which shows Joe Biden ahead at the time of writing) Onslow expects volatility to subside quickly. That said, markets will need time to adjust to any new policies that are enacted.
“I think markets are already beginning to react to the growing likelihood of Joe Biden becoming the next U.S. President, so it won't be a total surprise if that’s the result. I think the potential for a negative short-term reaction comes from the candidates’ differing tax policies. Joe Biden is running on a platform that would raise the corporate income tax to 28% from the current 21%. That would have an immediate negative impact on corporate profits. He’s also looking to repeal some of the tax breaks on higher-income individuals, which may have negative short-term implications on the stock market.”
What does this mean for Canadian investors at the portfolio level?
“For us, it’s very high risk to make a lot of portfolio changes prior to an election outcome,” says Onslow. “As we saw in the last presidential election, the final vote was a surprise and the markets, which were expected to drop significantly in the event of a Trump victory, actually turned positive and delivered a strong performance.”
That’s why it’s important for investors to stay focused on their long-term goals. Our fund-manager partners, like those at Addenda, have been through scenarios like this before. They know what to expect and have plans in place for continued success.
“I think monetary and fiscal policies are the two biggest overarching concerns, and both of those look promising for equity markets moving ahead,” says Onslow. “We pay attention at the margin level and try to analyze things on that basis. We haven’t, and won’t, make any trades solely on our prediction of who's going to win the November 3rd election.”
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As we learned – with markets hitting their lowest point in March, only to bounce back through the summer, far quicker than expected – volatility is a normal part of investing. Reacting emotionally? Trying to time the market? These are not recommended investment strategies.
Instead, let our financial representatives* help you create an investment plan that’s geared toward your personal goals, risk tolerance and time horizon.
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