Why one portfolio manager believes a majority government and a pro-business agenda are critical factors in this year's federal election
After a competitive 36-day federal campaign among all parties, Canadians took to the polls Monday and elected Mark Carney, who remains the 25th Prime Minister of Canada.
As David Kletz argues, the critical factor in this election shouldn’t be about the winner. Rather, whether the government forms a minority or majority government.
While it's still unknown whether the Liberals will form a minority or majority government as Elections Canada paused overnight voting early Tuesday, preliminary results suggest Carney's government will form a minority government.
"I'm much more interested whether it's minority or majority, rather than if it's Conservative or Liberal," said Kletz, lead portfolio manager at Forstrong Asset Management, explaining that the level of political power is a catalyst for how much economic policy could be implemented.
Notably, whether Canadian equities could also perform well.
While he’s skeptical that a minority government would have the political strength to push for aggressive pension reforms, Kletz believes a majority would act as a much stronger catalyst for meaningful economic action as he asserted a majority would be the “more potent catalyst to get things done and move the economy in the right direction.”
"Governments always strongly encourage major pensions to invest domestically, but it's not a very forceful approach,” he said. “If you had a majority government, and particularly, I would say probably more right-wing leaning, I wonder if there would be a more forceful approach to try to encourage pensions to invest domestically. I don't necessarily know that that would be the case, but I could see that being something that comes up."
Still, Kletz downplays the differences between the two main parties when it comes to economic direction.
"The two policy standpoints, both from Liberal and Conservative perspectives on the economy, are not that different," he said. He cautioned that while both sides will "try to make themselves sound really different, to segregate themselves and win over the vote," at their core, both are "running on a pro-business agenda.”
A pro-business agenda
The shift towards a more business-friendly environment is also something plan sponsors should watch for, regardless of which party wins, noted Kletz.
"If we have moved to a more pro-business friendly environment, you're putting economic growth on a more solid footing," he said, adding that this would naturally make Canadian financial assets more attractive to investors.
For decades, Canada’s major pension funds have diversified their holdings outside the country, a trend Kletz sees as logical for managing risk. However, he argued that if Canadian assets become stronger in a renewed growth environment, it "stands that pensions could potentially reallocate back into domestic asset classes," he said.
Such a move, he suggested, could trigger "somewhat of a virtuous cycle," with larger pensions driving higher asset prices and better returns within the Canadian market.
“That could start a process where you do get this virtuous cycle of higher asset prices and good returns,” he said.
Kletz emphasized that regardless of which party wins, the economic environment looks set to improve and “is moving in the right direction economically. That should be a good thing for pensions.”
Additionally, Canadian pensions already maintain a sizable share of domestic assets, despite their diversification efforts abroad. He believes the change in leadership could reignite broader interest in the country’s markets.
"This change in leadership is much needed," he said, calling it "a needed catalyst for Canada to start becoming interesting again," not only for domestic pension plans but also for international investors.
While he stops short of suggesting that election results are irrelevant, Kletz believes the bigger takeaway is the shift toward economic domestic renewal. Irrespective of Monday’s outcome, he added that for the first time in a while, “there's a new reason for optimism for Canadian assets," after a period where productivity lagged and the market lacked energy.
"I think it would be wise for plan sponsors to share some of that optimism as well," he said.
