Last week, the Canadian federal election ended with a majority victory for the Liberal party. Although a minority win for the Liberals or governing Conservatives was seen as the most likely outcome according to the polls, the preferred outcome for the market (and the banks), in our view, was a Conservative or Liberal majority government. The worst plausible election outcome would have been a minority Liberal government supported by the socialist New Democratic Party, which likely would have led to fiscal policies less conducive to economic growth.
With change comes uncertainty, and with a change in government, comes at least some uncertainty over fiscal policy direction. That said, we believe the election of the Liberals is likely to see a continuation of the sound fiscal policy that has benefited Canada over the past several years, as the new government’s policies are not likely to differ materially (in substance) from those of the previous government.
Similarly, for the Canadian banking sector, we believe the status quo is the most likely scenario. Since the Liberals (thankfully) did not campaign on an anti-bank platform, the risk of any significant (new) regulatory headwinds appears to be low (although it is not zero).
Notwithstanding these expectations, until the new Liberal government appoints a finance minister and introduces its first budget, at least some uncertainty as to direction of fiscal policy and bank regulation is likely to be a small overhang.