How Does The Prime Minister Affect Your Investments?

With the recent intent of resignation by prime minister Justin Trudeau, many Canadian investors might be left wondering how a world leader affects their investments?

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Historically many investors allude to the fact that a country’s leader does not affect your investments. This is widely believed because over a long enough period the S&P 500 for example has an upwards momentum if you track it over decades. While this is mostly true, it does not depict the whole picture and misses some key details. A country’s leader does in fact affect some investments, but maybe not the way you think.

Investments Versus The Leader

You may have seen the image below before if you have been investing for any period of time. It simply shows the growth of the S&P 500 over the past 100 years or so versus each of the American leaders that were present. The general consensus is that over a long enough time frame, the market will move upwards regardless of who’s in charge. At a quick glance this seems to be the case historically. The problem is none of us will be investing for that period of time, and if you zoom in to sections of 30, 20 or even less than 10 years the graph may not be going so smoothly upwards.

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Currency Exchange

Moving back over to Canada, one of the biggest factors that will change in a new election is the currency exchange between USD and CAD. Since Canadians and our neighbours are largely correlated when it comes to economic policy, this exchange rate is usually a good signal for the assumed strength of the economy. Below is a screenshot of the exchange rate between the two currencies over the past month. We have been hovering around 1.43-1.45 CAD for every USD recently, however you may notice something interesting the day Trudeau announced resignation.

With my poorly drawn arrow and circle, you’ll see (while small) there was a sudden drop off of the currency which meant the CAD was gaining strength against the USD. Now, with the upcoming Trump administration, it’s believed the USD will start gaining strength as well so the sudden drop off quickly regained momentum. However, this is a good indicator and example of an effect the country’s leader may have. Since the expectation is that the conservatives will win the next election, the market is predicting a stronger Canadian dollar.

But how does this affect your investments in particular? Well if you buy some of the most common index funds such as ticker VFV, you may have seen that this is an “unhedged” position. Simply put, you not only get the returns from tracking the S&P 500, but also any positive or negative returns from USD to CAD currency exchange. This means that if the CAD gets weaker compared to the USD then you will receive MORE on your investment, since there is more CAD per USD; the opposite is also true. A hedged position would be one that does not get affected by currency conversion. If the CAD gets stronger, you protect yourself from that extra risk, however if the CAD gets weaker you miss out on extra upside. Click here for a more in-depth explanation: Unhedged and Hedged

This is a prime example of how a leader may affect your investments. Holding unhedged or hedged ETFs will be directly affected by how well or poorly the economy is doing. Since the market is forward looking, the future prime minister will directly affect your investments based on the success of the Canadian economy.

Economic Sectors

So outside of currencies and economic forecasts, how else might a country’s leader affect your investments? Well the actual prime minister themselves may not change your investing strategy, however their policies might have an impact on certain sectors or areas of business. Using the S&P 500, it had a forward momentum for decades, however what was driving that momentum each year? Each year something new might be creating those returns. Recently since we’ve been so tech heavy the past decade, major companies like NVIDIA, Apple or Microsoft have been driving a hefty portion of the index. Other years in the past it may have been healthcare, or energy, or retail; this is the same in Canada.

The Liberals have been long against an increase in oil and energy usage for example. In the next election, the majority of Canadians and the market expect an increase in oil, gas and energy usage. The Conservatives are expected to win the election, and since their platform on oil and energy inversely reflects the opposing party, we’re seeing this in these companies. Shown below is an example of an energy and oil ETF over the past month. You’ll notice we’ve been on the climb in comparison to other sectors since Canadians are expecting a positive outlook on this sector in the coming months.

The same is happening in the US, since both future leaders are expected to be very oil friendly, the sector as a whole is seeing an upwards momentum while other areas of investment may not be getting the same traction. So does this mean we may continue to see a rise in a sector like this? Very likely. Does it guarantee it? No. This is simply an observation about how a leader might be affecting your investments, and using one sector over a short period as an example.

So What Does This Mean?

So what do these conclusions prove? Well that’s up to you. This article is simply a reminder to start digging a little deeper before you take any advice or opinions as is. It’s important to consider other things in your investments like macroeconomics, politics, and sector variation before you dismiss them. There’s always more that can be learnt, and you should start researching what drives the market each year, and maybe you can find some correlations to help you understand your investments better.

It’s now up to you to decide how you proceed. The most important thing is to always be following your plan, and you should not be straying from the path because you saw someone say something different. Look into it, research it, and decide whether it matches your own thesis. Remember, there’s always more than meets the eye.

As always, do your research and happy reading/investing!