Any slump in Canadian stocks in the wake of the U.S. presidential election will be fleeting, history suggests. And while this isn't any normal election, market strategists say the brighter outlook for energy outweighs rising qualms about the outcome.
Canadian stocks tend to sell off on a change in the White House, regardless of the winner, with the S&P/TSX Composite Index tumbling in the aftermath of eight of the past nine U.S. elections, according to data compiled by Bloomberg. Yet the longer term outlook remains positive with a rebound in energy stocks, which represents 21 per cent of the index, expected to keep fueling the developed world's best-performing equity index, according to analysts and investors.
"This is going to be another buying opportunity as we've seen some nervousness bleeding into the markets," said Hans Albrecht, fund manager at Toronto-based Horizons ETFs Management Canada Inc. which has about $5.86-billion in exchange-traded products. "This is one election where people are truly confused about the two candidates. But it's also just an election. That's what leads me to believe the market will sort it out, and then we go back to TINA -- There Is No Alternative."
The S&P/TSX has posted a cumulative loss in the first five trading days immediately following eight of the last nine elections stretching back to 1980 with the average retreat 1.9 per cent, according to data collected by Bloomberg.
By the end of the election year, the index tends to retrace some of those losses, posting an average 0.9-per-cent decline. Adding in non-election years, the index has gained an average 2.1 per cent from November to year-end since 1980.
Still, this is no typical election with Republican candidate Donald Trump vowing to tear up the the North American Free Trade Agreement, which has been a boon to the Canadian economy, and Hillary Clinton opposed to trade deals that don't create jobs. A presidential election win by Donald Trump would reduce the value of the S&P 500 Index, the U.K., and Asian stock markets by 10 per cent to 15 per cent, according to economics professors Justin Wolfers and Eric Zitzewitz in a paper released by Brookings.
The outlook for company earnings offers significant ballast to the benchmark Canadian gauge, which has advanced 12 per cent so far. The S&P/TSX rose 0.3 per cent to 14,644.20 at 9:50 a.m. in Toronto. While crude has given back some of its gains in recent weeks, prices are up almost 75 percent from the 13-year low in February. Analysts see energy producers poised to deliver a five-fold profit increase in 2017 on the back of this rebound, according to data compiled by Bloomberg.
"There's an awful lot of rhetoric in political campaigns and sometimes the first reaction from voters is 'Oh my god, they're going to implement all of their commitments and promises,' which will scare markets a bit," Tom Caldwell, chief executive officer at Caldwell Securities Ltd., said by phone from Toronto. His firm manages about $1.5-billion. "And then people realize it's just election talk, and it's actually difficult to get anything done."
Canadian companies that are dependent on export, including auto-parts makers Magna International Inc. and Linamar Inc. and lumber producers such as Norbord Inc. may be vulnerable in any circumstance, and definitely so in a Trump victory, Mr. Caldwell said. He's hanging on to oil and gas giant Suncor Energy Inc. and Teck Resources Ltd., the diversified miner that's the best-performing Canadian stock in the past seven years, as well as Barrick Gold Corp., as a way to play gold in the event things take a turn for the worst.
Energy is far more important to stocks than cross-border manufacturing trade, Matt Barasch, chief Canadian equity strategist at RBC Capital Markets, said in a phone interview from Toronto. "This is one of those things where what's bad for Canada isn't necessarily bad for the TSX."
Meanwhile Canada stands to benefit from Mr. Trump's other policies such as those on energy and pipelines, Mr. Barasch said. He has said he wants to cancel the Paris climate deal and ask TransCanada Corp. to resubmit its proposal for the Keystone XL pipeline, which would connect Canada's oil sands to the U.S. Gulf coast.
Equity markets can digest and look past a lot of things, and this situation is no different, even if investors -- especially in the U.S. -- are acting a bit spooked right now, Horizons ETFs' Albrecht said. The CBOE Volatility Index has soared some 48 per cent since Oct. 24 as the FBI re-opened an investigation into Hillary Clinton's e-mails, he said.
"Headline risk is really big right now, and given we have a week to the election, we're nervous," he said. "Here's a chance to fade the fear trade which is very juicy here."