October 20, 2015 / 5:43 AM / 2 years ago

Uncertainty of new Canada gov't seen weighing on C$, energy sector

OTTAWA, Oct 20 (Reuters) - The election of the first Liberal Canadian government in nearly a decade will likely weigh on the country’s currency and energy stocks on Tuesday as investors take a cautious approach to the party and its untested prime minister.

Liberal leader Justin Trudeau rode a late campaign surge to a stunning election victory on Monday, turfing the incumbent Conservatives with a far more resounding victory than polls had indicated.

Although the majority win removed some of the uncertainty that an unstable minority government could have caused, analysts said it will take time for markets to adjust to the new administration.

“We’ve had nine years of Conservative leadership now, so for the most part ... Canada and the international investment community knows what to expect from a Conservative government,” said Scott Smith, senior market analyst at Cambridge Global Payments.

The prospect of a new government weighed on the Canadian dollar during Monday’s session. The currency extended its weakness against the greenback in overnight trading, hitting C$1.3048, or 76.64 U.S. cents.

One of the biggest changes the new government will bring is its plan to run C$10 billion deficits for three years in order to boost infrastructure spending in a bid to bolster the economy. By contrast, the Conservatives campaigned on balanced budgets.

“There’s still questions as to whether Trudeau can effectively run the economy in that deficit position and then bring back a balanced budget in year four,” said Smith.

Even so, government bond prices were little changed.

Infrastructure stocks, such as SNC Lavalin, could get a lift from the spending plan, though some cautioned a Liberal win was “baked into the price”.

Energy shares could see pressure as markets look for clarity on Trudeau’s policy. While Trudeau opposes the Northern Gateway oil pipeline to the Pacific Coast, he backs the Keystone XL line to the United States.

“Moving from a Conservative government to a Liberal government isn’t necessarily negative for the energy sector, but it definitely will add to the uncertainty because the Liberals have been fairly wishy-washy on what their energy plans are,” said Bryden Teich, associate portfolio manager at Avenue Investment Management.

Still, analysts said any market weakness was unlikely to be drastic.

“Financial markets will give the majority government a chance, but they’ll be keeping a close eye on how aggressive we see any changes in policies,” said Youssef Zohny, portfolio manager at StennerZohny Investment Partners+ of Richardson GMP Ltd. (Additional reporting by Julie Gordon in Vancouver; Editing by Jeffrey Hodgson and Alan Crosby)

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