Blame Canada...

Canada’s Prime Minister Stephen Harper is preparing to introduce a budget that will include a massive stimulus package that could lead to a C$60 billion deficit over the next couple of years. As recently as October, Harper derided deficit spending and encouraged investors to “buy stocks because they were cheap”, so this is a major about face for the Conservative leader and on the margin improves our view of Canada as it indicates a more normal and rational political situation in Canada – assuming the budget passes tomorrow.

Following the abrogation of Parliament late last year, ahead of a planned vote of non-confidence that would have brought down the Conservative government, it seems that Harper may have learned his lesson. While the NDP and Bloc Quebecois have publicly stated that they do not support Prime Minister Harper and will not support this budget, the Liberals have been more coy. Specifically, Liberal Leader Michael Ignatieff, who is also the leader of the Minority, said on Friday:

“On Tuesday, we'll all see whether the prime minister has learned to listen. If he hasn't learned to listen, he's not going to lead for long."

If the Liberal vote is in favor of the budget, it will pass and the Conservatives will remain in power.

The key debate between the Conservatives and the opposition will be on the tax component of the stimulus plan. The opposition leader, Michael Iganatieff of the Liberal Party, is pushing for a package weighted to investment versus tax cuts, with the tax cut component skewed to lower income Canadians. It seems that if the budget, which is to be released tomorrow, satisfies these primary components, the budget should pass.

On the margin, both Harper’s willingness to govern with ideological flexibility and the general thawing of the political process in Canada are positive for our view on Canada. While we are not crazy about deficit spending, Canada has the lowest debt to GDP ratio of any of the Group of Seven countries at ~29% and while this spending is projected to take that ratio up to closer to ~35%, Canada will still have a relatively strong balance sheet.

We have outlined our current Trade levels for the TSX 300 below, which are Buy at 8,424 and Sell at 9,101.

Daryl G. Jones
Managing Director