What Investors Need to Know About Canada's Election Next Week

  • Liberals ahead in polls but likely to fall short of majority
  • Uncertainty over vote has stock and currency traders on edge

Canadians vote in a federal election Monday that will probably put an end to the decade-long reign of Prime Minister Stephen Harper’s Conservatives, and may be followed by uncertain negotiations to secure a more left-leaning government.

The opposition Liberals under Justin Trudeau are poised to secure the most seats in Parliament, polls suggest, while falling short of the 170 required for a majority. The worry is the Liberals, who have governed for much of the past century, will require the backing of Tom Mulcair’s New Democratic Party, which has socialist roots, to stay in power and pass legislation. The possibility has rattled investors since the election campaign began in August and uncertainty over the election outcome has traders seeking to protect against currency swings next week.

Other possible scenarios making the outcome of the Oct. 19 vote the most interesting in decades are a Conservative minority, constitutional wrangling over governing legitimacy, an outright coalition and even a repeat election.

To help navigate the possibilities, the following is all you need to know about Canada’s election and why it matters.

Economy

Canada is the world’s 11th largest economy, has the seventh-largest stock market by capitalization and the soundest banking system, is the largest exporter of oil in the Group of Seven and also the biggest importer of U.S. goods. The next prime minister will need to find ways to build new pipeline capacity in the face of opposition from environmentalists, determine whether the Bank of Canada should target higher inflation with lower-for-longer interest rates, manage some of the world’s most expensive real-estate markets that threaten the financial system and decide whether to return the country back to deficits in order to give its wobbly economy a jolt.

Erik Hertzberg/Bloomberg

Constituencies

Like other former British colonies including Australia and New Zealand, Canada has a parliamentary system, divided into 338 electoral constituencies, or ridings. Election winners will sit in the House of Commons, the lower house of Parliament. The prime minister is the head of the leading party. Canada doesn’t have a directly elected leader like the president in the U.S. or in France.

Parties

There were six parties with seats in the last Parliament: the governing Conservatives, the Liberals, the NDP, the separatist Bloc Quebecois and its spinoff Forces et Democratie, and the Green Party. Elections Canada’s website lists a total of 23 registered parties promoting causes ranging from communism to animal rights.

Popular Vote

Because of Canada’s first-past-the-post system, a party doesn’t need to win the popular vote to win an election. The Conservatives won the most seats in the 1979 election while losing the popular vote. The Liberals won a majority in 1997 while receiving 38.5 percent of the vote, the lowest level since 1867 for a majority government. Harper won his majority in 2011 with 39.6 percent of the vote. The Liberals typically need a higher share of the popular vote in order to secure the same number of seats as the Conservatives, given much of their support is concentrated in urban ridings.

Opinion Polls

According to the latest national averages compiled for CBC News, the Liberals have the support of 35.6 percent of voters, versus 30.4 percent for the Conservatives and 23.8 percent for the NDP. Based on these levels of support, the CBC estimates the Liberals would win 140 seats, the Conservatives would take 110 seats, the NDP 86 seats, and the Bloc and Greens would win one apiece.

Erik Hertzberg/Bloomberg

Minority Government

A government lacking a majority -- like the Liberals would in this scenario -- must get support from other parties to pass laws. While some parties have collaborated, such as the Liberals and the NDP in the 1970s, historically there have been no formal coalitions in Canada and that’s unlikely to change. 

The NDP has helped keep minority Liberal governments in power in the past in exchange for the implementation of favored policies. There is reason to believe the Liberals and the NDP can find common ground again, given they both have said their primary objective in this campaign is to get Harper out of office.

Policies on which the two parties agree include reforming the electoral system, putting a price on carbon, cutting taxes for small businesses and raising them for stock options. The NDP’s two flagship policies -- a new universal daycare program financed by higher taxes on corporations -- would be among the first requests made but the most difficult for the Liberals to accept. Mulcair has also been very critical of Trudeau’s plans to run deficits.

Cost of Money

Any scenario that gives the NDP a major influence in government is probably negative for the Canadian dollar. Still, the most precarious outcome for markets -- a victory by the New Democrats -- is being discounted, with Canada’s dollar advancing about 3.5 percent in October as the NDP fell in the polls. A relatively strong Liberal minority may be a better outcome for the dollar than a Conservative plurality, which could trigger a political crisis if the other two parties seek to bring Harper down even if he wins the most seats. 

“As for the market impact, we believe that the implications for financial markets are limited and likely to be more positive if the Liberals form a minority government than if the Conservatives form one,” Charles St-Arnaud, an economist at Nomura International Plc, said this week in a note to investors.

Political Crisis

Parliamentary tradition dictates the sitting prime minister will get an attempt to govern with the support of other parties if no party has a majority. While Harper has said he will step down if his party doesn’t finish first, things get interesting if he pulls off a plurality.

The other two parties are unlikely to allow him to stay in power and will seek to bring him down at the first opportunity in a confidence vote. Under that scenario, Governor General David Johnston, Queen Elizabeth II’s representative in Canada who was appointed by Harper, could call another election or ask the second-place party if it could command the confidence of Parliament.

King-Byng

If Johnston chose to hand the reins of power to the second-place party, it would be a historic decision and raise questions about the new government’s legitimacy. It would mark the first time in the nation’s history a second-place party was asked by the governor general to form government.

If Harper requests a new election and is refused, it would only mark the second time a governor general has rejected the recommendation of a prime minister to dissolve Parliament. That last time was in 1926, the so-called King-Byng affair that pitted Prime Minister William Mackenzie King against Governor General Lord Byng.

Harper’s Fate

The strength of the minority would be critical in terms of allowing Harper to make a case to govern. The closer the Conservatives are to the 170-seat mark, the harder politically for other parties to band together to defeat them in the House of Commons. The weaker the minority, the less likely Harper is to continue.

Based on polling numbers, the best case scenario for Harper is a weak minority. While Harper has done well to hold on to his base of voters and keep his party’s support stable at around 30 percent, his pool of accessible voters has been shrinking throughout the campaign amid a growing desire for change. According to the Nanos surveys, only 38.2 percent of Canadians would even consider voting for the Conservatives, down from 50.3 in July, before the election was called.

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