Investors Won Canadian Election

05/16/2011 11:27 am EST


David Dittman

Chief Investment Strategist, Australian Edge, Canadian Edge, & Utility Forecaster

The recent triumph of Stephen Harper’s Tories at the polls makes one of the world’s most business-friendly countries that much friendlier, writes David Dittman in Canadian Edge.

There were multiple historic outcomes when all the ballots were counted after last month’s election in Canada. This was good for Prime Minister Stephen Harper and New Democratic Party (NDP) leader Jack Layton.

As for the Liberal Party of Canada, it’s searching for a new message, a new leader and a path back to relevance. And the Bloc Quebecois are a separatist party whose once-serious desire for independence no longer seems to exist.

Harper’s Conservative Party of Canada surpassed the most favorable final poll numbers and the fondest hopes of its supporters on its way to winning 167 seats in the House of Commons, 13 more than the 154 needed to claim a majority.

Harper led the way with a 63-point victory in his own riding (district), as the Tories won 39.7% of the national vote. He’ll form his first majority government in the next couple weeks and settle in for a fixed, four-year term.

The NDP turned big swaths of the Great White North to its side during this five-week campaign, benefiting from the (perhaps final) collapse of the Bloc to win 58 seats in Quebec and 30.6% of the national vote. The affable Layton’s leftist troupe will form a more definite official opposition party, as it surged to 101 seats from just 36 before the election to overtake the Liberals.

The latter no longer can claim to be Canada’s “natural governing party.” Michael Ignatieff, the former Harvard academic who returned home after 27 years abroad as a sort of savior, has already resigned his post as leader of the Liberals after losing his seat in Parliament.

The party is headlong into its ritual soul searching, this one the most serious yet. In their eyes a chasm has opened up between Tories and the NDP, to be filled, naturally, by their “centrism.”

Vive Le Canada
The Bloc Quebecois got wiped out. Founded more than 20 years ago, the Bloc had become the federal voice of those within Quebec who pushed for independence. Under Gilles Duceppe’s leadership, the Bloc peaked at 42 seats in Parliament after the 2006 election (Quebec has only 75 seats total), but a slide that began in 2008 is now complete.

There’s great potential for high drama based on a new calculus that looks a lot simpler, a lot more like the binary, zero-sum game we enjoy in the US.

But there’s likely to be little heat, as the prime minister simply doesn’t need the help of any of his vanquished foes. Excluding Quebec from the equation, Harper won 49.7% of the vote and 161 of the 233 available seats, as close to a mandate as is possible in Canadian politics these days.

And despite his dramatic surge, Layton still must provide responsible opposition, and he must do so with a caucus full of neophytes and socialists.

Harper’s major challenge is a dual one: he must keep his own caucus together, while avoiding any movement toward partisan excess. Leading minority governments for five years—when getting legislation passed depended, as a matter of mechanics, on getting other parties to sign on—has given him valuable experience.

What this means for the American investor looking for high yields in Canada is tertiary. The primary driver of Canada’s long-term upside will be emerging markets, led by China and India. The secondary factor, from an economic perspective, is what happens in the US, still the other half of what remains the largest bilateral trade relationship on the planet.

NEXT: Tax Cuts on the Menu


Tax Cuts on the Menu
What we’re guaranteed is that Harper and his Conservatives now have four years to govern without the constant threat of being toppled.

A program of corporate tax reduction will run its course, taking Canada’s rate down to 15% by January 1, lowest among the G7 group of top economies. A budget tabled in March will likely be passed with only minor adjustments, and a fiscal plan to get back to surplus by 2014 or 2015 will continue.

Canada is unlikely to pursue carbon regulation without similar movement by the US; however, the new Conservative majority is likely to continue to support the buildout of renewable capacity as a means of attacking the global warming problem.

Another way to look at this is that oil and gas producers won’t face the hostility an NDP/Liberal coalition would have meant, and they don’t have to deal with corresponding cost uncertainties.

What we have here is one of the world’s most stable, investor-friendly environments. That would have been the case even if Layton and his social democrats had won enough seats to establish a government, because the policy differences on the major issues aren’t that stark—the NDP said it would simply stop, not roll back, corporate tax reductions, and it, too, is committed to a budget plan that restores Canada to balance by 2015.

The country is well positioned to benefit from a return to normal economic growth in the US, and as more and more emerging-market consumers join the global middle class, with all the implications for consumption of natural resources that this implies. The commitment to the Canadian form of universal health care is strong across the parties—but so, too, is the commitment to responsible exploitation of the country’s hard and soft commodities.

The market’s reaction to what was probably the best possible outcome from an investor’s perspective—a resounding win by the Conservatives, a majority government formed by Harper of energy-rich Alberta—reflects the fact that the domestic situation is of lesser importance than external factors. Oil, sensitive to global growth metrics as well as geopolitics, was down, and so was the S&P/Toronto Stock Exchange Index.

Canada has done well, however, to trust the investor-friendly Harper and the Tories with a majority government for four years. It’s good news for the Canadian dollar. It’s good news for energy producers.

It’s good news, too, for wireless competition, as the Conservatives favor loosening rules to allow greater foreign investment in the domestic telecom industry, and therefore the funding of new market participants.

This has been called an unnecessary election. But its outcome has clarified the Canadian political situation and leaves the country on a stable policy course.

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