What will the U.S. election mean for Canadian investors?

U.S. elections are known for their outsized hyperbole, but once the ballots are cast any lingering concerns about what it could mean for Canada-U.S. trade typically dissipate. But this is not your typical U.S. election. Canadian investors anxiously awaiting the outcome are smartly asking what it could mean for their portfolios.

There is no shortage of bravado in the prognostications about what a Donald Trump or Hillary Clinton win would mean for the markets. Mark Cuban, tech entrepreneur and owner of the Dallas Mavericks, is convinced a Trump win would plunge stock markets and upend the bond market, should he find a way to follow through on a plan to renegotiate the U.S. national debt. Whereas Marc Faber, a respected market voice and author of the “Gloom, Boom & Doom Report”, cautions Clinton’s US$1 trillion tax hike “will destroy the whole world.”

As divergent as these viewpoints are, the takeaway is clear: The outcome of the U.S. election will impact your money. Depending on who gets into the Oval Office, our economy, and our portfolios, could be in for a wild ride, even if it’s much less dramatic than the destruction of the world.

If you’re looking for prognostications, there are hundreds—mostly in the event of a Republican win. Some have even the 13% run up in the S&P/TSX Composite this year is due in part to large U.S. investors positioning their portfolios in the event of a Trump win.

Here’s a sample:

Invest in companies that are sensitive to exchange rates like Dollarama and Baytex, because a Trump win would put pressure on the U.S. dollar and lift the loonie.
Buy Lockheed Martin Corp., Northrop Grumman Corp. and Boeing Co., as they’d benefit from increased defence spending.
Be on the lookout for The GEO Group, the private prison real estate investment trust, which would likely be an important cog in Trump’s pledge to round up and deport illegal immigrants.
And lastly don’t forget Cemex, the Mexican cement company—because if they’re going to pay for the wall, then they aren’t going to buy American.

For the political neophyte, reality TV has never been so captivating. For investors, it’s unnerving. If you’re rooting—or cringing—on the sidelines, Clinton is the better bet for your portfolio. Trump is such a divisive figure that markets around the world will likely experience more volatility under his watch, says Stephen Lingard, a portfolio manager with Franklin Templeton Solutions. The former First Lady, on the other hand, represents the status quo.

Expect volatility if Trump beats the odds »

Before you start altering your portfolio, here is a look at some of the larger ways a Clinton or Trump win would affect Canadian portfolios. Let’s start with Trump.

Trump on trade

Trump is trying to capitalize on a populist anti-trade sentiment in the U.S. The Republican Presidential nominee’s feelings for the Trans-Pacific Partnership and the North American Free Trade Agreement is clear, repeatedly saying he would love to tear them up.

At least when it comes to the TPP, Clinton and Trump appear to be somewhat on the same page. The Democratic Presidential Nominee agrees the TPP has its flaws, even though she once supported it, and now pledges to renegotiate the agreement if elected.

Trade is the issue that will impact us the most, says Lingard. The North American economy has more than doubled in size since NAFTA was signed in 1994. According to Global Affairs Canada, “NAFTA has had an overwhelmingly positive effect on the Canadian economy,” and its increased trilateral trade within North American from $288 billion in 1993 to more than $1 trillion in 2015. If NAFTA changed in any significant way, Lingard says it could send Canada into a recession.

Scrapping the TPP may not plunge Canada into recession since the agreement isn’t in force, but it could hobble future growth. In September, André Downs, chief economist at the department of Global Affairs Canada, said that the TPP would expand economic output by $4.3 billion thanks to increased access to hard-to-tap markets like Japan.

Crossing the border could be harder under Trump »

A Trump win would be positive for Canadian stocks

Beyond trade, though, the differences between the two candidates are much more pronounced. Matthew Barasch a Canadian equity strategist at RBC Capital Markets, goes as far to say that Trump presidency would be good for Canada. Barasch zeros in on Trump’s tax cuts. “The broad cuts of the magnitude that Mr. Trump is calling for would most likely provide a big boost to the U.S. economy, at least for a period of time, and considering that the U.S. remains by far Canada’s largest trading partner, the flow through to Canadian growth would likely be fairly meaningful,” he writes in a note to clients.

Are low interest rates doing more harm than good?

If you are willing to put your portfolio before the environment then Trump is good news again. Barasch argues that Trump’s energy policy would be another positive for Canada. Trump is a major proponent of Keystone, a pipeline that would likely spur investment in the oil sands.

Iran becomes another wildcard under a Trump presidency. “Should the nuclear agreement with Iran be jeopardized in any way and thus Iranian barrels be put at risk, the positive impact on oil prices could be significant,” writes Barasch in his note.

On the flip side, Trump’s plan would reduce federal revenues by $9.5 trillion over 10 years, and that would require the government to massively reduce spending, which could negatively affect Americans, according to the Tax Policy Center.

Will markets rally around Clinton?

If Clinton gets elected, not much would change, says Bob Sewell, president and CEO of Oakville’s Bellwether Investment Management, though one policy that could impact Canadian health care companies is her desire to cap drug pricing. She’s also said that she’s against Keystone XL, but that she does want North America to invest more in clean energy, which our Prime Minister has expressed an interest in as well.

Healthcare stocks might fall under Clinton, while energy companies and defence operations could see gains under Trump. It’s worth noting that overall, markets have done better under a Democrat president than a Republican one. On average, the Dow Jones Industrial Average has a 7% annualized return under a Democrat leader, while it’s only grown by 3% annualized under a Republican, according to Bespoke Investment Group.

All that said, it’s likely that stocks will see more ups and downs as the election draws nearer, and especially if the race tightens even further, says Sewell. He’s getting more cautious and says that now’s not the time to be taking any sort of substantial risks. “Reduce your beta, reduce the volatility of your equity holdings and keep more cash in your pocket,” he says.