Canada’s PM vote will influence energy, financial sectors

By Michael Bellusci on 9/19/2021

(Bloomberg) --With Canadians set to vote Monday in a highly competitive election, the outlook for the two largest sectors in country’s stock index hangs in the balance.

Polls say the race is close. If Prime Minister Justin Trudeau wins, as now looks likely, he may follow through on a promise to increase taxes on the biggest banks and insurance companies and impose stricter emissions rules on oil and gas companies. Financial and energy stocks make up 44% of the benchmark S&P/TSX Composite Index.

If, however, Conservative leader Erin O’Toole pulls off an upset, it could potentially bring a relief rally to the two groups.

A return of Trudeau’s Liberals with a minority in the House of Commons could also help turn investors’ focus back to the pandemic and fiscal support from the government, according to David Rosenberg, chief economist and founder of Rosenberg Research & Associates Inc.

“The performance of bonds, equities and the loonie will likely be hitched to external factors including the trajectory of the pandemic, secular disinflationary trends and the global commodity trade,” Rosenberg told clients in a note.

The index has advanced 17.5% this year, with technology and energy leading the pack. Here’s a breakdown of sectors and stocks to watch:

Energy

A Conservative victory could boost investor sentiment toward Canada’s oil & gas sector, where pipeline development has faced hurdles and carbon taxes are set to act as another headwind.

The Tories have promised a more gradual approach to reducing carbon emissions and are more pro-pipeline. Trudeau’s Liberals have pledged to force oil and gas companies to set five-year targets to cut their emissions, with the aim of reaching net zero by 2050.

A Liberal government, meanwhile, would be a minor positive for utilities and renewable power companies, according to Scotiabank.

The next government is expected to negotiate with various indigenous groups on the sale of the Trans Mountain oil sands pipeline, which the government purchased from Kinder Morgan Inc. for C$4.5 billion in 2018.

Stocks to watch: Suncor Energy Inc. (+16%), Cenovus Energy Inc. (+42%), Pembina Pipeline Corp. (+33%), Enbridge Inc. (+24%), Brookfield Renewable Partners LP (-10%) and TransAlta Corp. (+33%).

Financials

Banks and insurance firms in the sights of a government that ran a C$314 billion deficit last year. and is looking for revenue. Trudeau’s Liberals pledged to hike the corporate income tax rate by 3 percentage points on profit over C$1 billion at financial institutions.

A bank tax hike “absolutely could limit the amount of M&A that Canadian banks do in the U.S.” or globally, said Lara Zink, chief executive officer of Women in Capital Markets. It’s money these firms would otherwise use to grow their U.S. businesses, she added.

Higher taxes could also prompt Canada’s banking giants to pass on the cost to borrowers through higher interest rates and service fees, according to Bloomberg Intelligence.

Stocks to watch include: Toronto-Dominion Bank (+15% YTD), Royal Bank of Canada (+22%), Bank of Montreal (+32%), Canadian Imperial Bank of Commerce (+34%) and Manulife Financial Corp. (+8%).

 

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