CONTRIBUTORS
David Andrews
Institutional Portfolio Manager
Franklin Templeton Fixed Income
This election was overwhelmingly about tariffs—which is one of several key issues faced by the country.
Without doubt, tariffs matter a lot to Canada. Headwinds from residential mortgage renewals, slowing immigration, and the lack of Canadian business investment had already weakened our outlook for the Canadian economy; tariffs add another layer of uncertainty.
But that is a short-term outlook. What about the next four years? We needed to hear more about where we as a nation are headed in the long run. Instead, campaign rhetoric was long on “elbows up” emotional appeal but the key parties presented platforms that were short on workable long-term solutions.
An opportunity to fix what’s ailing Canada
On a positive note, this round of tariff disruption did make one thing clear; as a nation, we have been too focused on the relationship with just one trading partner. Going forward, we need to determine where we will invest and how to take advantage of our assets to attract long-term investment capital.
This country is rich in natural resources. We have a deep pool of very well -educated workers. How do we invest in that to make ourselves attractive not only to Canadian investors, but to investors around the world? That’s what we need to do if we want to increase productivity, attract foreign capital and produce sustainable long-term growth.
Minority government redux
The election of a second consecutive minority Liberal government leaves most of these questions unanswered. Given the closeness of the vote, it is not yet apparent if the government will be able to pass legislation without the support of the other parties. Whether or not this government will be able to effectively address the issues remains to be seen.
What happens next?
From a market perspective, we expect volatility to continue given the economic uncertainty. While remaining cautious, we do see volatility providing opportunities. For example, we see rates moving lower and a much steeper yield curve, and we have positioned our portfolios accordingly. Duration has re-emerged as an important consideration amid signs of slowing global trade. However, the ongoing uncertainty surrounding the trade environment clouds the outlook for 2025, underscoring the importance of active management.
Tariffs are an impediment to the economy, but not to the way we invest. In our portfolios, we can actively take advantage of market dislocations using the “plus” component that gives us exposure to non-Canadian markets and off-index opportunities. Since the Canadian economy is likely to be more affected by tariffs than the US economy, access to that “plus” component will be important, both for sheltering capital and taking advantage of opportunities outside our home market.
The Canadian bond market is small and very concentrated, so we have added diversification in pursuit of strong risk-adjusted returns. We believe our global perspective, paired with our local expertise, equips us to respond to emerging trends and market shifts in times of uncertainty.
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