Canada snap election 2021: How debt & inflation can impact TSX Index

Highlights

  • The S&P/TSX Composite Index is up 26 per cent on yearly basis.
  • Canada has the lowest debt-to-GDP ratio in the G7 grouping.
  • Inflation can compel retail investors from investing disposable income in shares.

The Canada snap election is just around the corner. The two major political parties are looking to win majority seats in the House. Bloc Quebecois, New Democratic and others hope to increase their hold.

Before Canadians step out to cast their votes, let’s look at important data that can decide the trajectory the Toronto Stock Exchange (TSX) takes.

Canada snap election 2021, TSX Composite Index, debt, inflation

Image source: Pixabay

Government debt

Institutional investors keep a close tab on debt. Unsustainable debt can lead to macroeconomic woes and impact the stock market.

According to data compiled by the Department of Finance, debt was high even before Covid struck. The opposition has time and again called out government debt levels under PM Trudeau. The interesting side is that although the debt-to-GDP ratio is high, Canada fares well when compared with its G7 peers.

Also read: Canada snap election 2021: How a Liberal win could impact stock markets

The debt-to-GDP ratio is nearly 48 per cent. Both the main parties, the Liberals and Conservatives, have talked about billions of dollars in spending over the next five years on their election platforms. This can drive debt higher but if the incoming government can manage to keep macroeconomic indicators healthy, stocks will continue to give good returns.

Also read: Canada snap election 2021: How a Tory win could impact stock markets

Price rise

Inflation remains an issue for the Bank of Canada. The central bank has maintained policy rates at a record low. Rising prices of basics including clothing and groceries took inflation to 4.1 per cent in August 2021.

CIBC’s survey in December last year reflected Canadians’ anxiety over prices. As the cost of living is on the higher side, it can limit investments by retail investors in the market. The past one and a half a year was a period of growth for TSX-listed stocks. For the momentum to sustain, the market needs a steady flow of investment.

S&P/TSX Composite Index growth 2021

The TSX topping 20,000 in June this year was the highlight of the Canadian stock market.

At the time of writing, the index stood at nearly 20,490. It has returned over 26 per cent in the past year. The year-to-date (YTD) return is nearly 17.5 per cent. The impact of inflation and resurgence of Covid over the past few months reflects in a subdued YTD return as compared with the full one-year return.

The recent numbers of the TSX Composite Index echo restrained investor interest.

S&P Global Image: © 2021 Kalkine Media Inc.

Image description: TSX Composite Index Yearly, YTD, QTD Return.

The quarter-to-date (QTD) return stands at nearly 1.6 per cent at the time of writing and the month-to-date return is in the negative (-0.45 per cent).

A few sectors may shine

Despite recent muted growth in the Canadian stock market, some sectors may shine post the results of the snap election. The clean energy sector and electric vehicle industry are likely to gain.

The Liberal Party has pledged to achieve net-zero level emissions by mid-century. The Conservative party has rallied behind Canada’s Paris target of 30 per cent reductions as compared to 2005 levels by 2030. In the run up to the snap election, green energy, healthcare and banking were some key debate areas. Stocks of related companies can react to the result of the election.

Bottom line

The S&P/TSX Composite Index performed well despite the pandemic. However, recent weeks have seen muted investor interest as compared with last year’s frenzy. The snap election 2021 will decide the fate of political parties, all of who have their own approach to deal with revenue and spending including aspects like corporate taxation. Spending decisions of the ruling party will shape the trajectory of the Toronto Stock Exchange.

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