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What are we looking for?

As the saying goes, “when the U.S. sneezes, the world catches a cold,” and Canada is no exception. According to FactSet’s geographic revenue data, Canadian companies in the S&P/TSX Composite Index generate a collective 31.3 per cent of their revenue from their southern neighbour.

With the U.S. presidential election rapidly approaching, certain stocks and sectors will inevitably be affected depending on the results. To better understand which companies to consider targeting and which to avoid, we conducted an analysis of the historically best and worst performing sectors in the calendar year after an election to identify potential trends.

The screen

To begin, we compiled a list of the four most recent U.S. presidential election years, the winners and the party they represented, starting with George W. Bush’s win in 2004.

We then took a look at historical data for the S&P/TSX Composite over that period, to see which two sectors did best in the year after a presidential election based on stock market performance.

Finally, a screen was created to select the three companies that currently lead in each of the two top sectors that we selected based on our historical data. They are ranked by five-year historical beta, a measure of stock price volatility relative to movements in the overall stock market. Companies with high beta tend to have higher returns than the overall market during upswings and lower returns during downswings. By identifying sectors that may perform well, and singling out those companies most affected by market movements, we can identify some of the potential winners after an election year.

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What we found

Looking back over the presidential elections since 2004, The S&P/TSX Composite returned an average of 20.3 per cent in the year after the election, compared with 2.4 per cent during the actual election year and an average of 9.2 per cent for any given year. Stock markets tend to respond negatively to uncertainty, which may explain the poorer returns in an election year. This hypothesis is supported by the fact that there have been outsized returns in the year after an election as uncertainty around a winner is wiped away. Over all, whichever party wins the presidency seems to have had an inconclusive impact on the returns of the S&P/TSX the following year.

Looking at individual sectors, health care performed the best (34.5 per cent), followed by energy (27.4 per cent). Health care is often a hotly debated topic in elections and Canadian health care companies derive 26.9 per cent of their revenue from the United States, according to FactSet GeoRev, which may explain the outsized returns. On the other hand, energy is a global commodity priced in U.S. dollars and fluctuations in the strength of the currency may explain energy’s volatility around election time.

Canopy Growth Corp., a marijuana producer and distributor, had the highest five-year beta (2.3) in the health care space followed by Aphria Inc. (2.1), another marijuana producer, and lastly, Trillium Therapeutics Inc. (1.8), a clinical-stage oncology company. Canopy Growth and Aphria may benefit from a Democratic win; vice-presidential nominee Kamala Harris has discussed decriminalization of marijuana at a federal level, potentially making it easier for future reforms to pass.

In the energy sector, Cenovus Energy Inc. had the highest beta (3.6), followed by Enerplus Corp. and MEG Energy Corp. With the 2020 oil crash, these companies are trading at significant discounts. A win for incumbent Donald Trump may benefit these energy companies, as Joe Biden’s campaign has advocated for renewable energy at the expense of conventional oil and gas producers.

The worst performing sector in the year after an election, on average, regardless of which party won, was materials (7 per cent). The Canadian materials sector is dominated by gold companies; the yellow metal tends to perform well during times of uncertainty and its low returns are consistent with the theme of uncertainty dissipating the year after an election.

Select high-beta TSX-listed stocks

RankCompanyTickerGICS Sector Mkt. Cap. ($ Mil.)5Y Beta1Y Ttl. Rtn. (%)YTD Ttl. Rtn. (%)LTM EPS ($/Shr.)Div. Yld. (%)Recent Close ($)
1Cenovus EnergyCVE-TEnergy5,493.03.60-60.1-65.6-1.17n/a4.47
2Enerplus Corp.ERF-TEnergy565.33.59-68.4-71.8-2.424.72.54
3MEG EnergyMEG-TEnergy708.13.48-55.6-68.3-1.13n/a2.34
4Canopy GrowthWEED-THealth Care9,088.72.32-14.2-10.4-2.34n/a24.48
5Aphria Inc.APHA-THealth Care1,741.82.09-17.3-11.2-0.23n/a6.02
6Trillium Therap.TRIL-THealth Care1,631.01.834,300.01,124.1-2.47n/a16.28

Source: FactSet

The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.

Arjun Deiva, CFA, is a vice-president at FactSet Canada’s consulting division.

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