Liberal minority may not have been Bay Street’s first choice, but investors should like the results anyway
Many on Bay Street may have been hoping for a Conservative majority in the 2019 federal election, but if history serves as a guide, the outcome should suit investors just fine — at least in the short term.
On Monday, voters returned Justin Trudeau’s Liberals to government, albeit with a reduced minority mandate. Historically, it turns out, markets have initially performed much better in the wake of a Liberal minority victory than the Conservative equivalent.
Prior to Monday’s result, Canada had elected 10 minority governments since 1935 — five were run by the Liberals and five by the Conservatives. According to BMO Capital Markets chief investment strategist Brian Belski, Canadian markets rallied, on average, six per cent in the first six months and 13.5 per cent over the first 12 months of a Liberal minority.
By comparison, the TSX struggled out of the gate under the five past Conservative minority governments, losing an average of 2.2 per cent in the six months following the election.
“Why do you have an initial bump in the Liberal side of the things?,” Belski asked. “Well, if you think about it, especially if there’s a change from Conservatives, Liberals are much more stimulative because they spend more money.”
That rally has almost always immediately begun to fade in the second year of a Liberal minority government’s reign. By the time those governments fall, the average annualized performance of the markets sits at 6.5 per cent, according to Belski. Conservative minority governments start slowly, but have seen average gains of 9.8 per cent in annualized performance.
While past performance suggests the market could see a bump, Belski doesn’t recommend that investors make changes from the status quo. “Most investors are positioned for gridlock and gridlock is good,” he said.
Liberals are much more stimulative because they spend more money.
Brian Belski, chief investment strategist, BMO Capital Markets
The election result was better than the one Ninepoint Partners portfolio manager Eric Nuttall had feared, but he’s not in favour of immediate alterations either.
The energy file has caused division among Canadian voters, but in absence of a Conservative majority, a Liberal minority was the best option for investors, Nuttall said. A Conservative minority could have seen the Liberals form a coalition with the NDP to take power, he added, which would have put the Trans Mountain pipeline’s immediate future in doubt.
“The Liberals could’ve used an NDP coalition to abdicate their prior moral authority on the project,” Nuttall said, highlighting how strange an experience it was to be cheering for a Liberal minority. “I think today with a strong Liberal minority not relying on NDP votes, they would have the support of the Conservatives in getting the project through.”
Construction on the pipeline that the Liberal government bought for $4.5 billion has begun but could be sent back to Cabinet if the Court of Appeal rules in favour of the six Indigenous groups challenging its approval.
In the current arrangement, the Liberals would likely look to the other parties for support on a case-by-case basis. While the NDP and Greens can prop up the Liberals in legislation centred around climate change, the Conservatives would likely form an uneasy alliance with Trudeau to see the pipeline project through.
A Liberal minority government may have the ability to advance the interests of energy investors, but constructing Trans Mountain would likely take around 30 months, Nuttall said, meaning a catalyst for the sector might still be hard to come by.
“Given how skeptical people are I think you have to wait for oil to actually start flowing through,” Nuttall said. “I don’t think the first scoop of dirt is going to shift sentiment.”