SVP & PM explains what could be promising, where inflation could arise, and what advisors should be saying in the wake of a new Liberal budget
The first Liberal budget proposed under Prime Minister Mark Carney promises to be “transformational.” The budget proposes $141 billion in new spending, along with $51.2 billion in savings and a projected budget deficit of $78.3 billion. While the cuts are focused largely on the operations side of government, the spending is largely focused on capital expenditures and investment in defense. Much of that spending is being presented as a means of restarting Canada’s lagging productivity and incentivizing significant private sector investment, while helping to diversify Canada’s trade relations away from the United States.
Michael Greeneberg stresses that this budget’s promises will be tested on their execution. The senior vice president, portfolio manager, and head of Americas portfolio management for Franklin Templeton Investment Solutions explains how this kind of capital spending could be effective, while noting how bottlenecks and poor execution could result in far worse outcomes. He explained how advisors can make sense of the ongoing implementation of this budget for their clients and highlighted areas that investors need to stay aware of now.
“The challenge, of course, is implementation. And there will be some that will be more optimistic and some more pessimistic on the government's ability to efficiently spend money. in a productivity enhancing way,” Greenberg says. “it's not enough to say you want to build something. If you want to build something but do not have the workers or the machinery or the materials to do that, that can quickly cause some bottlenecks and can quickly become fairly inflationary, which will be counter productive to what you're trying to achieve.”
Greenberg notes that some early implementation signals might include the restart of specific targeted immigration to help with key labour shortages as well as moves by provinces to lower some of their interprovincial trade barriers. The relaxing of regulations on key targeted industries, too, might be a signal of positive impact. He notes that while the budget does aim to spend a great deal on major projects, it comes with the target of incentivizing private sector investment in these projects, which may prove a better way of executing on targeted goals. He notes, though, private-public partnerships aren’t always successful and still need a degree of oversight from government.
Looking at the asset impacts of this budget, Greenberg notes that Canadian currency should remain largely rangebound until the long-term goal of more diversified trade is achieved. While Canada has maintained significant monetary policy divergence from the US in the past year, a secular decline in the US dollar has helped keep CAD somewhat stable against the greenback. Its position against other global currencies is somewhat less favourable, though, and Greenberg expects the currency to remain bound into a slightly weaker range until trade is more comprehensively diversified, though he notes that this may not be a bad thing for an export economy.
While a $78 billion deficit may be eye watering at first glance, the point has been stressed that among developed nations, Canada has ‘room to spend.’ Compared to countries like Japan and the United States, Canada has a comparatively lower debt to GDP ratio, but Greenberg likens the situation to a ‘less dirty shirt.’ Nobody in the developed world seems to have low levels of overall debt, but Canada has slightly lower public debt levels than its peers and retains a AAA rating in its bonds. While deficits are cause for concern, Greenberg notes that in a period of anemic growth and trade uncertainty, taking on debt in this way may be justified. He projects growth over the medium to long-term to rest just below two per cent, possibly rising higher if the budget is truly effective, and contrasts that with interest costs, which remain below growth.
“I would say Canada does have some room. I don't think it's we can't spend like drunken sailors,” Greenberg says. “It needs to be efficient spending.”
As he assesses the effectiveness and efficiency of that spending, Greenberg says he will be looking closely at inflation and employment data. A cooling economy should see both indexes fall as well, so aberrations from that trend may be cause for further examination. He’ll also be listening closely to company reports as firm investments in productivity enhancing technologies may or may not prove additive for the overall Canadian economy.
From a fixed income market perspective, Greenberg highlights the risk of inflation as potentially worrying for investors and advisors. He notes the overall trend of fixed income markets becoming more tied to equities, and highlights how increased fiscal spending could see yield curves steepen, lowering prices for long bonds. He remains constructive on the Canadian bond market as there could be upside in Canadian bonds if the economy slows further and forces additional rate cuts.
As advisors make sense of this budget for their clients, Greenberg continues to emphasize the two sides of major investment. There is a chance that this all works out and productivity rebounds, or there is a risk that fuel gets added to the inflation fire. He advocates for an asset allocation approach measured against both potential outcomes.
“the risk of a little bit higher inflation, a little bit more higher inflation volatility, but lots of investment that hopefully is productivity enhancing and growth positive. Equities are a pretty good hedge to that long term. So stocks over bonds,” Greenberg says. “if you're a longer term investor, having equities in the portfolio for growth still make a lot of sense. Are they going to be volatile? Sure. but that's why I couch that with being a long-term investor because you can live with that.”
