Implications of a Trump Victory and a Republican Landslide

Donald Trump’s victory in the US presidential election and a potential Republican takeover of Congress have important implications for Canadian investors. Possible ripples (both positive and negative) include hostile trade policies, the further weakening of the Canadian dollar, additional strain on the domestic economy, and tailwinds for Canadian banks and equity markets.

“Donald Trump would have a clear runway to enact whatever fiscal and economic agenda he sees fit, and those policies could have a significant impact on some Canadian businesses [such as the banks] that operate south of the border,” says Mike Archibald, vice president and portfolio manager at AGF Investments.

Bank Stocks Are Potential Winners

Under another Trump administration, policies are expected to support less regulation for businesses. “This would most likely be of greatest benefit to the banking sector, and specifically to those [Canadian] institutions that operate a sizeable amount of their business in the US,” adds Archibald. As a result, Canadian banks with US exposure would continue to garner investor interest.

Trump’s pro-business and market-friendly policies create a sense of certainty, which is favored by equity markets. This was borne out by a sharp rally in stock prices, pushing the Morningstar US Market Index, the S&P 500, and the Dow Jones Industrial Average Index to record highs following his victory. Such an environment is positive for Canadian stock markets that track such indexes, as evidenced by a strong rally in the Morningstar Canada Index and the S&P/TSX Composite index.

For the year to date, the Canada Index has gained more than 15%, mirroring the US Market Index (up 25%) and the S&P 500 (up 24%).

More Fuel for the Energy Market

Since the United States is Canada’s biggest trading partner, anything that affects the former’s economy and markets directly implicates the latter. “In the event of a Republican sweep, Canada’s economy might benefit initially from stronger US growth, as its largest trading partner buys three-quarters of its merchandise exports,” reads a note from BMO economists led by Doug Porter.

As part of his campaign, Trump vowed to lower energy costs by helping oil and gas producers ramp up production. This could have profound implications for the Canadian energy sector. “Energy producers would rejoice if the Keystone XL pipeline was resurrected,” says the BMO note. Trump is widely expected to revive the pipeline, which Biden blocked with an executive order that revoked its permit. When operational, the pipeline would transfer oil from Alberta to Nebraska.

“The Keystone XL pipeline might even rise from the grave,” agrees Stephen Brown, deputy chief North America economist at Capital Economics. “While that would be bad news for Canada’s climate credentials, it would almost certainly provide an economic boost.”

The Dollar Dilemma

The US dollar jumped sharply after the election. This weakened the Canadian dollar, which was already reeling from the effects of the Bank of Canada’s half-point interest rate cut, which sent it tumbling against the greenback.

Market watchers fear Trump’s protectionist trade policies could make things worse for the loonie. Increased uncertainty about tariffs and the fate of the US-Mexico-Canada Agreement—a treaty Trump introduced during his first term, replacing NAFTA—could squeeze capital flows to Canada and weaken domestic investment, worsening the nation’s productivity.

“Suffice it to say, none of this is good for the Canadian dollar, which is already challenged by faster rising unit labor costs relative to the US,” says the BMO note. The Canadian dollar has steadily weakened against the US dollar this year, moving from C$1.34 to nearly C$1.40 in the past month alone.

Are Trade Tariffs On Their Way?

Desjardins economist Royce Mendes hopes Canada will continue to enjoy a favored status under a Republican administration and be spared harsh tariffs. “Upcoming protectionism is likely to be more directed toward countries such as China and Mexico,” he says, adding that Canada will remain America’s second-largest trading partner after Mexico. He also believes Canada’s energy supply (accounting for 30% of the nation’s exports to the US) will be “very likely exempted from whatever tariffs are threatened.”

However, a full-scale implementation of Trump’s 10% tariff plan, which is unlikely but not impossible, “could lead to a near-5% reduction in Canadian export volumes to the US by early 2027,” according to a TD Economics report led by senior economist Beata Caranci.

Brown says in such a scenario, the Canadian government would likely retaliate with its own tariffs, which “would inevitably cause a hit to [Canada’s] GDP.” By one estimate the move could shave off 5% of Canada’s GDP. Brown adds that tariffs would cause a renewed rise in inflation, forcing the Bank of Canada to keep policy relatively tight. “Because trade disruptions would damage both demand and supply, a large fiscal response would also risk being inflationary,” he argues.

Further, damage from unfavorable trade policies on Canadian manufacturing would likely ripple through the nation’s jobs market, a key variable informing the Bank of Canada’s monetary policy decisions.

Trump Arm-Twisting Could Hurt the Canadian Economy

A Trump presidency could also force Canada to increase its defense spending sooner than planned. “Canada will be pushed harder to raise its NATO contribution” to 2% of national GDP on defense from the current 1.3%, “potentially leading to a higher budget deficit,” says the BMO report.

This would create more strain on the economy while the Bank of Canada is working to bolster it with successive interest rate cuts. “Any threat to its outlook could spur a more aggressive response,” the BMO note says.

While there are significant downside risks to the economy in the worst-case scenario, Brown wants investors to “keep an open mind to the idea that any policies designed to benefit the US could also benefit Canada.”

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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