Announcer 1:
On April 28th, Canadians elected members of Parliament to represent them in the House of Commons. The following day, BMO hosted a discussion to cover the economic, markets, and tax policy implications.
Announcer 2:
Welcome to Markets Plus, where leading experts from across BMO discuss factors shaping the markets, economy, industry sectors, and much more. Visit bmocm.com/marketsplus for more episodes. The views expressed here are those of the participants and not those of BMO Capital Markets, its affiliates or subsidiaries.
Camilla Sutton:
Hello and welcome to our digital event, the Canadian 2025 Election Outlook. I'm Camilla Sutton, MD and Head of Equity Research for Canada and the UK. And as we're recording this, it's not quite official, however, it appears that the Liberals led by Mark Carney will lead a minority government of 168 seats falling just shy of a majority. Both the Liberals and the Conservatives each managed to claim over 40% of the popular vote and the Conservatives appear to have won 144 seats, the Bloc with 23, the NDP losing party status with seven seats, and the Green with one.
The Liberals will need to form a government, make a cabinet, return to Parliament likely in late May. And today we wanted to dive in with the economic, the markets, and put a tax lens on it as well. We only have 30 minutes. I wanted to get started right away by introducing our speakers. Jennifer Lee, MD and Senior Economist at BMO Capital Markets, Brian Belski, MD and Chief Investment Strategist, Head of Investment Strategy Group at BMO Capital Markets, John Waters, Vice President, Director of Tax Consulting Services at BMO Private Wealth.
Welcome to all three of our speakers. I'm glad you're able to join us. I don't want to waste a minute. So Jennifer, let's start with you. Let's start at a really high level. With the likely Liberal minority win, what parts of their platform will have the most significant impact on our economy?
Jennifer Lee:
Thanks for that question, Camilla, and thank you everyone for joining us today. So first, I want to start off by saying whoever said that Canadian politics is boring is so not the case, especially last night it was riveted. But I will say that this was definitely not the ideal outcome. Ideal outcome would've been a majority win regardless of the party. But as our chief economist Doug Porter put it, Liberals have a super strong minority. That is, they are only four seats shy of a majority.
It probably means that we're not going to have another election for another four years. And plus, I don't think the NDP and the BQ have really the stomach for it right now. So while we are waiting for things to wrap up, and by the way, I think that we cannot completely at all dismiss the possibility of a majority government, but we will see how the counting goes. There's still a lot to do, lots to do, but I think we have to focus on the priorities.
I think most of the Liberal platform should hold just depending on who they lean on, if they're going to be leaning on the NDP for those four votes. But the first thing that we have to do is to address what basically was the dominating theme for this election over the past few months, and that's basically trade and our relationship with the US. So having Prime Minister Carney call up President Trump, arrange a face-to-face meeting. Various students should definitely be step one.
And I certainly think that is what helped Mark Carney's win just at the expense, of course, of the NDP and the BQ. Canadians are looking to him to establish a better working relationship, warmer, friendlier perhaps, and that what we have seen in the past. So having said that, we know that number one ain't going to be easy. And number two, it is definitely a two-way street.
It's not just up to Prime Minister Carney, of course, and his team, but a lot of it's going to depend on how he is received in the US by President Trump and the cabinet and what the US demands are, whether or not they're reasonable, whether or not they can be met. So imagine they both walk around, size each other up, and figure out what they each want, what they expect, and what they're willing to do. So that, by the way, is step number one.
Now, the other parts of the Liberal platform will have a big impact. I'm going to do a little bit of promotion here. Hopefully everyone saw the guys right up on the Canadian election, the economics of it all. They detail very clearly all the platform for all four parties. But of all the different parts of the Liberal platform, I think the ones that will have the biggest impact will certainly be infrastructure spending because that adds maybe 0.3 to 0.4 percentage points to growth, and we're talking like highways and bridges and ports and airports and things like that and rail.
And all that spending has spillover effects too so like in terms of jobs. Now, we're also going to have to look at supporting those areas that have already been negatively impacted by tariffs, and they've got this $2 billion strategic response fund, and that's to support industries that have been impacted. And they also have another couple of billion in direct support for workers and businesses during the trade war.
Because even though we're in this 90 day pause period right now, there are already tariffs in place, like the 25% tariff on steel and aluminum, the 25% tariff on finished cars that were not made or produced in the US. But by the way, I'm trying not to get distracted, but there are headlines right now from Commerce Secretary Lutnick about changing up those rules. We're probably going to see some relaxation on that front.
Of course, 10% for energy and critical materials and potash. So all of that is already in place. So we got to deal with the fallout from that. I'm also very interested to see what Canada does about defense, because this is something that the US really wants to see. And we've been lacking in that front because the parties have been talking about boosting defense spending to 2% of GDP.
And I remember thinking, President Trump is looking at 5%, so we're a little bit behind. So I think we're going to have to step it up a little bit on that front on the defense front. And of course, tax cuts, that 1% tax cut to the lowest income tax bracket. No GST on certain homes and all that. So all that is going to have a big impact.
Camilla Sutton:
Jen, why don't we dig a little bit deeper into the trade and tariff situation? The new government from an economics lens, what are your views here?
Jennifer Lee:
That's a tough one. So like I said, all this is going to depend on how this new relationship develops and how tariffs will remain when all the talks are said and done, what's going to happen with the USMCA. Now, of course, it's not going to be particularly encouraging if we continue to hear the comments about the 51st state. And that did pop up I think it was yesterday on Truth Social.
But I think that just given how closely tied the US trade picture is with both Canada and Mexico, so we have to remember that it's like 33% of all of the US exports head to both Canada and Mexico. And of those 33% of exports, they encompass roughly 72% of all different export categories. It's pretty wide-ranging. So my hope, by the way, is that a trade deal gets done here first.
But at the same time, it's not just about the US, even though we have a big share, 75% of all of our exports go to the US, we're also going to be looking at other trade deals that Canada could make with other countries, with other regions. There's also talk about all the interprovincial trade barriers that could be knocked down. The talk has already started, which is encouraging. It's going to take a long time, but I think the key here is that we're going to see hopefully more diversity in our trade, not just to the US, but to other parts of the world.
Camilla Sutton:
Jennifer, one more for you and then we'll turn to other speakers. But maybe can you drill down a bit into the fiscal side. We've got a plan now, fiscal '25-'26 deficit at 2% of GDP. Is the average Canadian going to feel that? Is the bond market going to care? What are your thoughts here?
Jennifer Lee:
I think everyone's going to care no matter what, but I don't think the average Canadian is going to feel it. The main difference, by the way, when we're looking at both the Liberals and the Conservatives, they had a lot of different avenues I guess especially for the Liberals to support the economy. And that's going to get the deficit a lot higher to about 60 billion.
And again, if they have to lean on other parties, then they might have to spend more. So is the average person going to notice it? Not likely, but we are going to see marginal income tax rates drop, which is a good thing. Now, whether or not the bond market is going to care, we had, what was it, 60 billion deficit last year and about 50 billion the year before that or roughly.
So unless the deficit really, really deteriorates, like trade war deepens, we're going to spend a heck of a lot more money for the economy to support the economy, and we're going to get a lot bigger deficit than more bond supplies needed, then that's when the market might care. So if we look at it in relative terms, Prime Minister Carney is looking at roughly 2% budget deficit as a share of GDP, US is like 6.5% deficit as a share to GDP, so I think the bond market as a whole has bigger issues to worry about.
Camilla Sutton:
Brian, let's get you in on this a little bit here. Can you walk us through your market outlook for both Canada and the US in light of the election results?
Brian Belski:
Sure. Thank you so much for having us. If you take a look at the Canadian market, which we have been in print on now for almost a year, we started talking in print about Canada outperforming the US around June-July last year in our Canadian strategy report. And the second half of the year, Canada actually even given the strong move in the fourth quarter from the United States stock market, Canada did great the second half of the year.
And so far this year many people would be surprised to hear a couple of numbers. For instance, US market is down 6%, Canada flat here to date. Over the last 12 months, Canada is up 12%, 13%, I'm sorry, and the US is up 8%. Canada, as mentioned and measured by the proper index called the TSX, is only 4%, 4% away from an all-time high. It's actually closer to an all-time high than the United States stock market as measured by the S&P 500.
There's been a lot of negativity, a lot of negative rhetoric that has been surrounding Canadian stocks most of last year certainly, but then obviously since a lot of the tariff conundrum has occurred. We've said all along, Camilla, that Canada affords developed market investors and equities. We believe much more cyclicality, much more value relative to the US, especially considering the strong US stocks in '23-'24.
This has never been a call to abandon US stocks. It's been a call to add to Canadian stocks, especially considering that a lot of our clients from the institutional perspective and from private wealth for that matter have been focusing so much on the US the last couple of years. What's really interesting too that since the lows that we saw in April, Canada's up 10%, US is up 9%.
So even in the rally from the lows, Canada's outperformed. So what do we think from here? Unfortunately, we're dealing with what I like to call and what we said in print exogenous events. What we firmly believe the talk out of President Trump in the United States is more exogenous than not. Because why? We really don't know what the ultimate outcome is. And what we fear is that the majority of macro forecasts have already positioned for the worst.
We wrote a report last week in the United States and followed through with respect in our Canadian coverage talking about how earnings have already gone down, how sentiment's been very negative, how other sentiment ratios that we've looked at for more than 35 years have all bottomed out and actually are worse than what we saw in COVID. That to us from a contrarian perspective makes us want to continue to be quite positive.
So even though we revised our Canada target and our US target lower on April 9th, we still see new highs in Canada at 26,500 in terms of the index on earnings of 1550, that's $1,550 for the TSX index, while the S&P 500 is measured by US stock 6,100 to $250 earnings. That would give actually Canada outperforming at year-end, number one.
Number two, having actually a little bit more stronger earnings growth that we believe really speaks to the value/cyclicality of Canada where we like financials, technology. And consumer discretionary. We also like those same three sectors in the United States. But I think from a more balanced type of approach, I think going forward for the next three to five years, we're going to have kind of more equalized returns in both markets.
Camilla Sutton:
Brian, do you want to drill down just for a couple minutes here in terms of US trade policy and what its impact is on Canadian and US equities even into what sectors would be the most vulnerable?
Brian Belski:
Well, I think it's a great question, and that's where I caution people because the back and forth negotiations aren't done yet. And I think the market's already decided that it's going to be the auto parts that are going to get hurt and some of the steel stuff and some of the paper stocks. Consumer clearly has been hurt in Canada as well, technology shares. And I think that there's a little bit of a fear with respect to financials.
Again, we would caution people to rush to judgment principally because things could change very, very quickly. And so again, if we take a look at where analysts have changed their numbers already for the out year, we think that's actually quite premature. So at the end of the day, we are in this 90-day period, we don't have a specific view because we're going to try to follow the house view in terms of where these negotiations are going to go.
But I would just caution everyone that President Trump in the United States and Canada and the new Prime Minister Carney, we are great trading partners. We have been great trading partners from a proximity standpoint and from just an overall growth standpoint. And our companies are massively intertwined, not just in financials, but also with respect to the consumer side of things and clearly transportation as well.
So from a downside perspective, we believe the majority of the downside in Canadian stocks has already been represented in those areas, especially let's say in the consumer side or auto parts or the other areas that we mentioned. And so I do believe that the worst is already priced into these names and that's why we're so positive on Canada going forward and more solidification with respect to what we're seeing in the United States.
Camilla Sutton:
Terrific, Brian. John, let's pull you in here. Given the Liberal minority result, what are some of the key income tax changes and/or policy initiatives that we might see in the coming months?
John Waters:
Great. Thanks, Camilla. Happy to be here. I guess the first thing that I would mention from the broad perspective is decrease in the marginal tax rate at the low end. The lowest tax bracket by 1%, of course, has been touted. That also could have an impact on tax credits. I should mention that that rate also applies to most tax credits. So it'll be interesting to see if that happens on both sides, but certainly expecting to see that for 2025. Housing is another big initiative for the Liberals.
They've talked about removing the GST for first-time home buyers on the first million dollars for new home built and lowering the GST on above a million to 1.5 million to recognize the high prices in some of the major cities. And then reintroducing something called a multi-unit residential building or MURB tax incentive that originated in the 1970s and provides incentives in the forms of tax write-offs to spur the supply side in terms of the investors. Innovation is another big thing.
Expecting to see some continuation of the enhancement and reform of the scientific research and development that's already underway. This would largely be extending accelerated or immediate expensing for tax depreciation for manufacturing and processing equipment, clean energy, zero emission, that type of stuff. Probably the introduction of something called a patent box, which is a lower tax rate for income that's generated from development of intellectual property to reward the innovators to stay or develop those products in Canada.
And likely the expansion of something that's been very popular in the mineral and resource sector, the flow-through share initiative to provide some incentives to flow-through the research and development to the end investor for what the Liberal government is calling the startup ecosystem, so things like manufacturing, startups, biotech, AI, things like that. And then finally, for seniors expecting to see a temporary increase in the guaranteed income supplement by 5% likely in 2025.
And then also for this year a reduction by 25% in the minimum RRIF payment that is required to be paid. Now, we've seen that before in 2020 during the COVID years and then in 2008 during the financial downturn. So likely for people that have already taken out their minimum, probably an opportunity to re-contribute up to 25% if they so choose. Or for folks that haven't taken their RRIF minimum yet for this year, maybe hold on to the next couple of weeks and we'll get some more clarity on that one.
Camilla Sutton:
What about the capital gains inclusion rate? It's now steady for the foreseeable future, we'll never see it changed again, or do you think that topic comes back?
John Waters:
Well, I don't think it will come back in the short term. So just to set the background a little bit more, of course, this is the rumor that would never die and actually came true in 2024 where the federal budget had introduced the increase in the capital gains inclusion rate, which of course, is the amount of capital gains that is included in taxable income was set to raise from 50% to two-thirds starting in June 2024.
And that would be a dollar one for corporations and trusts and over a $250,000 capital gains threshold for individuals. So that never did get passed last year to the delays in the government and ultimately the prorogation of Parliament in January. But the federal government did come out in late January and said, "Okay, we're going to pause this and move forward with this change, this increase in 2026."
And very early on in the election campaign, Mark Carney, and for that matter, Pierre Poilievre, both came out and said, "No, we're not intending to forward with that." So Carney has been very clear that he has concerns that entrepreneurs need to be incentivized to take risks and to be rewarded when they succeed. So I think given his comments, it's very unlikely that he would move forward with this initiative notwithstanding that the NDP seeks to move forward. But I think if it is in fact a minority government and compromises are required, I don't think it's going to be over this issue.
Camilla Sutton:
Let's go back to the first part of what you were talking about, John. Does the minority government impact it very much versus if we'd had a majority? Do you think that the average Canadian or in fact most of the clients that you deal with day to day, what is the biggest single most important piece?
John Waters:
Well, yeah, to address your question, I don't think it's going to have a huge impact. And I say that because particularly with the Liberals and Conservatives, there's a lot of similarities. In fact, there's a lot of overlap with a number of the platforms with the parties. So I think compromise will be fairly easy in most situations. And obviously the NDP are supportive of tax cuts on the lower end.
The Bloc is supportive of benefits to seniors. So certainly the things that I mentioned in terms of the 1% cut and the reduction in the RRIF are probably things that we would expect to see in the short term. I'm hearing that the government will be called back probably as soon as late May, sorry, with a throne speech tentatively May 26th, I believe I heard.
And I would expect to get some clarity in that throne speech, probably has some clarity in the coming weeks over certainly if this is a majority or minority, but also the parties and the compromises that might be made. So the message I think is stay tuned. There's probably going to be a federal budget in June, mid to late June, so we'll certainly have a lot of clarity coming into that.
Camilla Sutton:
Jennifer, let's circle back to you here for a minute before we close out. We haven't seen a lot of movement in the Canadian dollar today. Can you just speak to your outlook for the Canadian dollar into year-end?
Jennifer Lee:
Oh, that's a tough one. So first of all, broadly speaking, we do see the US dollar finally weakening. We have seen that play out over the last couple of weeks just on the view that the US economy is not going to be unscathed from all of this. And of course, a lot of this is going to depend on what happens with the Federal Reserve as well, but we do see the US dollar in general weakening over the course of the next year and a half or so.
Canadian dollar on the flip side will be strengthening, but it still will be bumpy. Like we can't call the absolute ups and downs of it all. But I think it'll be interesting once the talks officially begin between Prime Minister Carney and President Trump over the trade deals and, of course, over USMCA. So we could see some potential weakening in the Canadian play out because of the results of those talks or how the direction that they're perceived to be going into.
But broadly speaking, still stronger Canadian dollar over the course of the next year and a half or so, maybe around below 140, like 136-ish by the time the end of 2026 rolls around.
Camilla Sutton:
All right, Brian, let's go back to you. I'm going to ask each of you exactly the same question to close out though. So really as a final question, what do you think is the most important thing that our audience should be thinking about in light of this election result and how it comes to investing and in other cases, their personal finances? Brian, do you want to kick us off here?
Brian Belski:
Sure. Thanks so much. This is my 36th year on Wall Street and my 13th year now, 14th year at BMO. And I think people sometimes have a hard time grasping that politics have nothing to do with the absolute performance of the stock market. It can either enhance or detract the current trend. And the current trend with respect to the fundamentals of Canada companies, not the economy, companies, not politics, companies. The fundamental trajectory of companies in Canada continue to improve. Period.
And that's why we like Canada. And I think sometimes a lot of times we let other things kind of get in the way. So at the end of the day, you got to check some of these other things at the door and really focus on what's happening with respect to the companies in Canada, with respect to the United States, world's largest economy, this too shall pass, again, with respect to our comments in terms of the exogenous events, with respect to President Trump and the agenda, with respect to tariffs.
As America goes, so goes Canada has been our primary theme for 13 years now at Canada and since we've been at BMO. And I do not see any of that changing going forward. And that's why we do believe over the next year or two, we will see significant upside with respect to equities in both Canada and the United States.
Camilla Sutton:
Thank you, Brian. John, why don't we turn over to you?
John Waters:
Yeah, I think, again, my most important message is really to stay tuned. I would say in my 30 plus years of tax, I've never seen the significance in the pace and the uncertainty of some of the tax measures that we've seen in the last couple of years. Obviously the capital gains inclusion rate, the Bayer Trusts from last year, the underused housing tax, and all of these significant changes coming in very quickly and with a lot of uncertainty. And I hope that that's behind us.
And despite minority government, I think we do have some clarity and stability. I don't think anyone wants to go back to an election anytime soon. So I am hoping for some clarity on these particularly major issues that we may see. I'm not saying there's not going to be changes, but hopefully these will be well-thought-out with lots of lead time so people can prepare and plan adequately. So it's really just stay tuned. We're going to get some clarity in the coming days and weeks. So certainly stay tuned to these channels and your BMO advisors to keep up to date.
Camilla Sutton:
Thank you, John. That's very helpful. Jennifer, you've got our last word here. Final question. What's the most important thing our audience should be thinking about in light of the election result?
Jennifer Lee:
So I'm kind of going to piggyback of what John was saying. It's not over yet. It ain't over yet. We're going to have to see how the rest of this, the counting falls out. I'm very curious to see what the final numbers will be, and that will determine how much of a super strong minority government this is. And of course, who he's going to, Prime Minister Carney is going to put in his cabinet. Are we going to see the same fears in place again, or are we going to see some different people and some different ideas?
I'm also very curious about whether or not the Canadian government will be able to not waste this crisis, so to speak, and take big, bold steps to diversify our customers and not just rely only on the US and figure out other trade deals with other countries and with each other, breaking down the trade barriers and all that by each province. So again, it's not over yet. And like John said, we'll just stay tuned to see how the rest of this election eventually officially unfolds with the final numbers.
Camilla Sutton:
Jennifer, Brian, John, thank you all very much for joining us today. I think you shared a lot of important, valuable pieces, so I'm really glad you were all available to join us. And as always, we're committed to helping you, our clients, even in the most complex of environments. With our extensive cross-border resources and expertise and content, your BMO relationship manager is always happy to help direct you.
You can visit our website, bmocm.com, for a video replay, podcast recap of today's event along with all of our updated content on tariffs and trade. And as well, you can stay tuned for future webinars covering macro events, including our upcoming special podcast on the political landscape, with Canadian political leaders Brian Tobin and Jason Kenney. With that, we were really glad you were able to join us today. We hope it was helpful, and I hope you have a great afternoon.
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John Waters:
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