Canada’s Election – and what it could mean for the TSX

[Update– My predictions in this article were incorrect: the Liberals, led by Justin Trudeau, ended up winning a majority government in parliament. I didn’t see that coming!]

In most countries, investors usually have a clear idea of what they want to see from an election. They want the victory of a competent, “market-friendly” candidate, with a majority government and no significant regional divisions displayed in the country’s voting patterns. This is, in fact, what they got out of the most recent Canadian federal election, in 2011: the right-of-centre Conservative Party won a decent-sized majority government (which was Canada’s first majority government since prior to 2004), winning in Ontario, British Columbia, and the Prairies, while at the same time Quebec abandoned its independence-minded Bloc Quebecois en masse in favour of the NDP, which also became the largest opposition party by a large margin in Ontario, British Columbia, and the country as a whole.

From the perspective of investors, it is unlikely that the 2015 election will be much more favourable than the current situation that exists in Canada. Even if the Conservatives were to win an even larger majority than they have now, which seems unlikely, this would still only be a continuation of the status quo, and would therefore be unlikely to generate any excitement among Canadians or foreign investors. Plus, given that the Conservative leader Stephen Harper has been Prime Minister for just short of ten years now, this status quo may start to become tiring even for investors and Conservatives. It would certainly not induce any sort of “hope and change” optimism that could potentially help stimulate markets in the short-term. To the contrary, the election campaign will probably make Canadians less confident in the health of their economy, as both the Liberals and the NDP may spend it trying to convince Canadians that Harper has brought the country to the brink of a recession.

In contrast, it is not very difficult to imagine that the elections could make Canada less appealing to investors. Here’s one scenario that would be much worse from an investor’s view: the Liberal Party, led by 43-year old Justin Trudeau (the son of a former Canadian Prime Minister) wins a minority government in parliament, while, on a provincial level, the country is regionally divided in its voting patterns, with Ontario going primarily for the Liberals, Quebec voting primarily for the NDP, the Prairie provinces voting primarily for the Conservatives, and British Columbia splitting its vote between two or three of the parties.

In such a scenario, Canada would have changed from having a “market-friendly” majority government led by an experienced Prime Minister and having no regionalist tendencies reflected in its voting patterns, to having a left-wing minority coalition government led by a young inexperienced Prime Minister (who would have been chosen purely because of his family name) and having significant regionalist divisions between eastern Canada and western Canada and between Quebec and the rest of the country reflected in its voting patterns.

If the NDP defeat the Conservatives instead of the Liberals, meanwhile, which is also possible (the NDP are currently the second largest Canadian party in parliament by far), it would bring to power a party that has never been in power before in its history, which until relatively recently was viewed by many conservatives as being “far left”, and which has a leader who is only in charge because of the tragic death of the former leader of the NDP following the party’s unprecedented success in the Canadian election of 2011.

Even worse, a staunchly provincialist party like the Bloc Quebecois, which is currently polling at around 10-20 percent in Quebec, could theoretically end up becoming the kingmaker in a split between the Conservatives and a Liberal-NDP coalition. Investors could turn on Canada to a certain degree if they begin to think that an increasingly fragmented result such as this is likely to occur. Thus, while the defeat of Stephen Harper’s Conservative Party or the loss of its majority position in parliament would not necessarily be bad for Canada over the longer term, it arguably represents a short-term challenge for the Canadian economy – and in particular, for Canadian financial markets – during the election year ahead.

For more on the economic position Canada currently finds itself in, see 5 Challenges for Canada’s Economy in 2015