Potential effects of a coalition government

Polls are suggesting the new federal government could be a minority, which means the party with the most seats might have to consider a coalition government. That result could have effects both benign and bleak for Canada’s economy and markets.

Despite the strong potential for a coalition government, economists aren’t forecasting related market volatility. “Don’t expect a huge market reaction when the results are announced,” said CIBC’s chief economist Avery Shenfeld in a report last Friday.

A minority government outcome in Canada offers less drama compared to other countries, he said. Canada’s two major parties “aren’t as far apart as, for example, the extreme left and right in some European countries, or even the Republicans and Democrats in the U.S.”

Consider that the respective plans from the Liberals and Conservatives both feature effective income tax cuts (the former party proposes raising the basic personal amount, and the latter proposes a cut on the first income tax bracket) and proposals for homebuyers. And, while the Conservatives have pledged lower deficits than the Liberals, neither plan would entail an escalation in the debt/GDP ratio, Shenfeld said.

Still, the potential for a coalition government presents a caveat for deficits and debt. As a coalition is formed, “There will be horse trading that may be more likely to inflate spending rather than taxation revenues and thus, perhaps, risk larger deficits,” said Scotiabank’s Derek Holt, vice-president and head of capital markets economics, in a report.

The more parties involved, the more complicated the horse trading. In a report, Douglas Porter, BMO’s chief economist, noted that, while coalition governments are nothing new to Canada, what is new is the potential for three parties to be required to hit the 170-seat majority threshold — and the various parties’ details on fiscal policy “differ wildly,” he said.

If the New Democratic Party (NDP) and the Green Party of Canada form part of a coalition with the winning party, the energy sector would most likely be disproportionately affected, said Mike Archibald, associate portfolio manager at AGF Investments Inc., in a video.

In such a case, pushing through with pipeline projects would be a challenge, if not impossible. “Both the Greens and NDP have said they will not support any more pipelines in Canada,” Archibald said.

Potentially affecting telecoms, both the Liberals and NDP have put forth plans to limit cell phone bill pricing, which has seen some reflection in telecom share prices, Archibald said. With a Liberal coalition government with the NDP, “the knee-jerk reaction might be a little bit lower on those stocks initially,” he said.

Election effects on other sectors

More generally, carbon taxes and climate action would also affect the energy sector, with the Liberals having a definitive plan for raising carbon taxing, and the Conservatives promising to scrap carbon taxes and move to a plan that involves incentives and carbon-capture technology. Expect either outcome to drive energy stock sentiment, Archibald said.

The best election outcome for the energy sector, he said, would be either a majority Conservative government, with the party’s pro-business stance, or a majority Liberal one, with its vested interest in the Trans Mountain pipeline expansion.

Archibald also noted that the election’s effect on housing, with the Conservatives putting forth plans to change the stress test rules and extend the amortization period for insured mortgages to 30 years from 25. The changes would benefit the financial sector — both banks and alternative lenders, he said. (The Liberals wouldn’t change the stress test, and would sweeten incentives for first-time homebuyers in key urban centres.)

While Canadians focus on local politicians today, a global focus will remain important. Regardless of the election’s outcome, TSX investors are likely to feel greater effects from macroeconomic events, Archibald said, including the outcome of U.S.-China trade talks and the ratification of the Canada-United States-Mexico Agreement.

For full details, view the AGF video and read the reports from CIBC, Scotiabank and BMO.

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