Conclusion: The left wing New Democratic Party of Canada is making serious inroads in the last few weeks, which leaves the outcome of today’s federal election in Canada highly uncertain. A victory by the NDPs could negatively impact Canadian equity and currency markets due to their mandate to both increase government spending and raise taxes.
Position: Sold our long position in the Loonie, via FXC, this morning
Canada is not known for its stimulating politicians or interesting elections. The nature of the parliamentary system is that the leader of a political party, who would potentially go on to become Prime Minister, needs as his or her primary skill the ability to manage the political system. Current Prime Minister Stephen Harper in many ways embodies this.
Prime Minister Harper grossly lacks the charisma that is considered a prerequisite for a successful politician in the United States. A recent article in Maclean’s magazine described Harper as a hologram on the campaign trail. Each appearance has been managed closely, included limited impromptu interaction with constituents, and is scripted so tightly that he even takes a break at the exact same time in each stump speech to drink water. In part, this is Prime Minister Harper’s nature and in part this is due to the Conservatives not wanting to make any mistakes as they attempt to attain a majority government for the first time in a generation.
We were in Canada this weekend doing some final due diligence ahead of the Canadian Federal election this Monday and all is not well for the Conservatives. In fact, we were told by some Canadian political insiders that internal polls heading into the final weekend show the PCs losing substantial ground nationally. Interestingly, it is not their arch rival the Liberal Party that is taking share, but the left wing New Democratic Party (“NDP”) led by long time leftist Canadian iconoclast, Jack Layton. In many ways, this is the worst nightmare for the PCs.
In Canada’s last federal election in 2008, the Conservatives won 143 seats in parliament, the Liberals won 77 seats in parliament, the Bloc Quebecois won 47 seats, and the NDPs won 36 seats. The Conservatives formed a minority government after that election. Earlier this year, the House of Commons passed a motion of non-confidence initiated by the Leader of the Opposition, Liberal Michael Ignatieff. The passing of this motion forced the Conservatives to call an election for May 2nd and end the longest minority government in Canadian history.
Initial polls at the beginning of the campaign in late March showed that the results of this election would likely be similar to the results of the 2008 election with some potential of the Conservatives to gain more seats, and potentially attain a majority government, due to high unlikable ratings of Liberal Party Leader Michael Ignatieff. In fact, according to a poll a week before the first major debate, the NDPs were expected to win 13.2% of the popular vote, which was roughly 5% less than in 2008. Surprisingly, after the first debate, the PCs remained well ahead, but the Liberals and NDPs were deadlocked at close to 25% each. This dramatic move by the NDPs is attributed to a shift away from the Bloc Quebecois in Quebec and the underperformance of Liberal Leader Igantieff.
In a more recent federal poll in Canada from Nanos Research, the resurgence of the NDP party has continued. According to this poll, taken over the last three days, the Conservatives have 37% support in Canada, the NDP have 31% support, the Liberals have 22.7% support, and the Bloc Quebecois, which runs candidates only in the province of Quebec, are a distant fourth with 5.5% of the theoretical popular vote. A more recent poll from Forum Research, which includes decided and leaning voters, gave the Conservatives 35%, the NDPs 33% and the Liberals 19%.
Historically, to obtain a majority of the 308 seats in Canadian parliament, a Party needs to win 40% of the popular vote. Given this, and the results from recent polls, it is very unlikely that the Conservatives win a majority. The long shot scenario is that the NDP and Liberals effectively split votes, which potentially allow the Conservatives to gain a majority without 40% of the popular vote. This scenario is highly unlikely.
The more likely scenario is that either the Conservatives or NDPs win a minority government. While a minority government is positive in the sense that it creates some limitations on power, the reality is that a NDP Prime Minister and minority government would look dramatically different than a Conservative Prime Minister and government. (Incidentally, the NDPs have never formed a government in Canada.)
From an economic perspective, it is difficult to argue with the performance of the Conservatives over the past couple of years, especially as this performance has outpaced, and really decoupled from Canada’s largest trading partner, the United States. As we highlight in the chart below, the Harper-led government has been effective at creating employment with an unemployment rate of 7.7% (versus 8.8% in the United States), the Canadian government has shrunk the deficit by 1/3 over the last 11 months, and Canadian economic growth continues to be strong, expected to come in at north of 4% in Q1 (versus 1.8% in the United States).
At a risk of oversimplifying their mandates, it is fair to say that NDPs and Conservatives have economic policies from two ends of the economic spectrum. The key “attributes” of the NDP economic platform are an intention to raise corporate tax rates to 19.5% (the Conservatives intend to cut to 15%), the NDPs intend to gradually double the benefits of the Canadian Pension Plan, they propose a budget that contains $30BN in additional spending, and it is likely that the NDPs implement a tougher energy policy, which would be negative for Canada’s energy producing regions and energy producing companies.
The Conservatives have done an admirable job stewarding the economy of Canada over the last couple years. This has been reflected in the strength of the Loonie, which is near an all-time high versus the U.S. dollar, the economic statistics outlined above, and the performance of Canadian equity markets. The NDP’s economic strategy is widely divergent from the Conservatives and the risk of a NDP-led Canada is that these economic policies are reversed and a reversal of the performance of the Canadian economy and its currency will follow suit.
We sold our long Loonie position via the etf FXC this morning in the Hedgeye Virtual Portfolio with FXC trading immediate term overbought. We’ll look to buy back the position at a lower price. Our support levels on the FXC for the immediate term TRADE = $103.65 and intermediate term TREND = $102.11.
Daryl G. Jones
Managing Director
