Economic Outlook

Post U.S. election guide for Canadian investors

2 déc. 2016
par BlackRock

Donald Trump’s unexpected election victory is having an immediate impact on financial markets, none bigger than the rally in stocks and dramatic sell off in bond markets that has pushed U.S. treasury yields to their highest levels in a year.

Trump’s aggressive plans to stimulate U.S. economic growth through tax cuts and increased government spending has fuelled the recent rise in bond yields alongside rising inflation expectations and growing anticipation of an interest rate hike by the U.S. Federal Reserve in December.

The prospect of higher yields south of the border has some potentially significant implications for Canadian investors. As Aubrey Basdeo explains in his post-election webinar (U.S. election outcome – Implications for Canadian markets), Canadian bond yields may continue to rise in step with U.S. yields, potentially putting pressure on Canada’s economy and it’s buoyant housing market. He expects fixed income investors to experience heightened volatility in the weeks ahead but also opportunities for excess returns for those who take an active, globally diversified approach to their bond portfolios.

At the same time, higher yields could play a role in determining winners and losers on stock markets. In a recent Financial Post Active Investor article titled Modest Fed rate hike could be good news for Canadian stocks, Kurt Reiman points out that Canadian stocks have done well in relation to U.S. stocks when the Fed has raised rates in the past.

One asset class to watch, in particular, might be preferred shares. Our new Insight to Action piece titled A preference for preferreds notes that attractive yields combined with a stable if not rising interest rate environment has boded well for rate reset preferred shares in the past.

Beyond these potential outcomes, Trump’s views on topics such as free trade, energy and fiscal policy have the potential to play a large role in shaping Canada’s investment landscape in the coming years. Kurt sums it up best in his blog, How a Trump White House could affect Canada.

In short, uncertainties abound. It is important to start thinking through a U.S. presidency and potential impact it could have on the Canadian economy and financial markets over the next four years. The devil will be in the details.