Commentary from
Eric Lascelles, RBC Global Asset Management Inc.

October 20, 2015

Canada’s centrist Liberal Party has won a historic majority victory, displacing the centre-right Conservatives after ten years in power for that party. The Liberals were expected to win after surging in the polls over the final two weeks of the campaign, but the majority victory – with 184 out of 338 seats in the House of Commons – substantially exceeded expectations. In the end, the Liberals managed to capture 39.5% of the vote, up from the 37% that the final polls had identified, and well ahead of the 32% support that had existed as recently as the beginning of October.

The Liberals’ gains came in large part from a decline in support for the centre-left NDP as voters seeking to displace the incumbent Conservatives coalesced around the more probable victor and embraced the party that offered a clearer contrast to the status quo.

Financial markets have responded to these results in a muted fashion. The Canadian dollar initially declined by a hair, but has since come charging back. Canadian bond yields are a few basis points higher, but then so too are America’s, suggesting a different driver. In all, financial markets have been largely unfazed by this development. This is likely in part because investors could see a Liberal victory coming from some distance out, in part because majority victories are usually welcomed, and in part because the Liberals’ proposed policy mix is not especially problematic.

Given the majority victory, the expected uncertainties associated with a minority government have been avoided. The Liberal Party now has a firm grasp on power for the next four years, and should be able to achieve the bulk of its policy goals.

Key policy aims of relevance to investors include:

• Running a modest deficit for several years to finance a significant increase in much-needed infrastructure investment.
   
• Increasing the income tax rate on high earners while lowering the tax rate on the middle class.
   
• Eliminating income splitting for families.
   
• Lowering the annual TFSA investment limit from $10,000 to $5,500.
   
• Enhancing the Canada Pension Plan, thereby likely eliminating the need for the Ontario government to proceed in this direction on its own.
   
• A greater focus on the environment, potentially resulting in a slightly less friendly stance toward the energy patch — from the perspective of both emissions and pipelines.

Prominent proposals outside of the investment space include:

• A commitment to scale back Canada’s overseas military activities.

A few other items remain murky:

• The Liberals have indicated that they will consult with MPs and the public over whether to approve the Trans-Pacific Partnership (TPP) trade deal. But given that the Liberals are avowedly pro free trade, and that there is no longer any wiggle room over the TPP details, it seems quite likely that the TPP will proceed under the Liberals.
   
• The Liberal Party was in favour of shifting to a form of proportional representation in the run up to this election. However, this was premised on the idea that Canada’s centre-left leaning voters were fragmented across multiple parties, creating a competitive disadvantage versus the more consolidated centre-right. Proportional representation helps to address imbalances such as these.

However, now that the Liberals have won a majority themselves, they may be less keen to pursue this policy. At a minimum, it is unlikely to be a near-term priority.

From an economic perspective, elections rarely change the script in a dramatic way. This one is arguably slightly negative for investors given some of the aforementioned policies, but could nevertheless provide a slight positive for Canadian economic growth over the next few years given the certainty of a majority government paired with additional infrastructure spending. The Bank of Canada is slightly less likely to cut interest rates again with a more activist government at the fiscal policy helm.