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How Will the Canadian Federal Election Impact the Financial Markets?
June 16, 2004
There has already been great debate concerning the 2004 US Presidential Election (November 4th, 2004), and the impact that a George W. Bush or John Kerry win may have on the capital markets. On top of this, Canadians will also have to take into account their own federal election when contemplating the future of the markets.
A Tight Race
When Prime Minister Paul Martin called for a federal election for June 28th, 2004, many expected the likelihood of a Liberal minority government. Since that time the Conservative Party of Canada, led by 46-year old Stephen Harper, established a campaign that has surprisingly earned a legitimate chance of winning the election (based on polls by research firm Ipsos-Reid).
The race grew even tighter after the important June 14-15, 2004 nationally televised party leaders' debates, where many voters often use the broadcasts to help decide how they will cast their ballots. A CTV News/Ipsos-Reid poll following the June 15th English language debate asked: "Which leader would make the best prime minister?"
Thirty-eight percent said they would choose Martin, while 36% went with Harper. The New Democratic Party's Jack Layton got 14% of the votes, and the Bloc Quebecois' Gilles Duceppe received 6%.
What A Minority Government Could Bring
It can be argued that a Conservative government would be better for stocks than bonds. Meanwhile, a Liberal government may be better for bonds. The rationale comes from the view that Conservatives would increase deficits and be more business friendly, while the Liberals would be more prudent fiscally and have less of an impact on the business side.
Whether the Liberals or Conservatives win this tight race, early polls suggest that a minority government (half or fewer than half of the seats in the legislative assembly) will likely emerge from the election.
Minority governments in Canada can cause uncertainty in the markets because they have been rare and prone to be short-lived. For example, there have only been two minority governments in the past 30 years, when Pierre Trudeau's Liberals were in power in 1972 and when Joe Clark's Conservatives held office in 1979.
The Canadian Dollar also has tended to weaken with a minority government. In the 1972 Liberal minority, the Canadian Dollar lost close to 1.5% in the first weeks after the election. Canadian Dollar weakness was also apparent in the 1979 election as the currency sold off more than 1.0% prior to the vote and another 2.0% when the government fell nine months later.
A weaker currency would strengthen the case for higher interest rates, which could have a detrimental impact on the equity markets. The Bank of Canada (BoC) opted to hold rates steady at 2.00% after its most recent meeting on June 8th, 2004. The BoC provided little indication of when rates would begin to rise, though it appeared to downplay the prospect of a move as early as the next meeting on July 20, 2004.
Election Impact not Substantial
Most periods of political uncertainty in Canada, including minority governments, have been met with increased market volatility. That could favour the safety of bonds over equities. But in recent history, any impact from the election amounted to little more than a brief ripple in the markets immediately after the election.
Moreover, the movement of the Canadian Dollar both before and after the past six elections has been small and inconclusive. Heading into the last six federal elections, the Canadian Dollar has rallied three times and has fallen three times during the preceding month. Following the last six federal elections, the Dollar has rallied four times and pulled-back twice over the course of the following month.
The average change in the Canadian Dollar during the month leading up to the last six federal elections has been a paltry -0.1%. Furthermore, the change in the Dollar in the month after the last six federal elections has averaged only 0.3%.
Finally, a minority government would not come as a surprise to many investors, since expectation of such a development has already been priced into the markets.
Conclusion
The results of the Canadian election are important in terms of how social policy and the economy will be managed in this country. However, if history is our guide, the direct impact that the elections have on the financial markets is likely to be brief, if not unsubstantial.
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