(Repeating to additional subscribers without changes to text)
By Euan Rocha and Alastair Sharp
TORONTO, Oct 19 (Reuters) - Given there is a good chance
that Monday's Canadian federal election will not give one party
control of the country's parliament, investors may want to brace
for a period of political instability that could dent Canadian
financial markets. The already weakened Canadian dollar could be
most vulnerable to a further drop, market participants warned.
Most recent polls have been suggesting the most likely
outcome is a center-left Liberal minority government, with a
lesser possibility that the ruling Conservatives will be in a
position to form a minority government. Either of them would
need the support of another party to govern
The Liberals and left-leaning New Democratic Party (NDP)
have telegraphed that they would not support Conservative Prime
Minister Stephen Harper if he formed a minority administration.
Under that scenario, they could bring down such a government and
either offer to form an alternative minority government or
trigger a new election.
The Liberals have said they will not go into a formal
coalition with the NDP, though there is always the possibility
that stance could change once the votes are in.
"What we could see is pressure on the currency more than
anything else," said John Stephenson, head of Stephenson & Co
Capital Management, noting it would be especially hard for a
minority Conservative administration to govern.
Liberal leader Justin Trudeau has pledged to run budget
deficits to fund infrastructure spending, which could boost the
stocks of engineering, construction and equipment companies,
though it may take a toll on government bond prices in the
near-term. Both the Conservatives and the NDP have stressed they
will balance the budget.
Below is summary of how some fund managers, corporate
executives, analysts and currency strategists see markets
reacting under a range of scenarios:
LIBERAL MAJORITY GOVERNMENT:
Among the companies who would feed off such infrastructure
spending are SNC-Lavalin Group SNC.TO , Stantec Inc STN.TO ,
WSP Global Inc WSP.TO , Aecon Group Inc ARE.TO and Toromont
Industries Ltd TIH.TO .
Canaccord Genuity analysts say the Liberals' deficit
spending plan may weaken the Canadian dollar and government bond
prices in the near-term. But they believe the resulting rise in
yields could boost investment returns for insurers like Manulife
Financial Corp MFC.TO and Sun Life Financial SLF.TO .
To be sure, some analysts believe the Liberals' deficit plan
could support the Canadian dollar longer-term. Nomura noted the
fiscal stimulus would reduce the need for further interest rate
cuts by the Bank of Canada, the nation's central bank. Two rate
cuts this year and the weakness in oil prices pushed the
commodity-driven currency to 11-year lows in September.
Any gains from the infrastructure spending could be at least
partially offset for some companies by the Liberals' plan to
give the environmental review process "more teeth," which could
slow development of new oil sands, pipeline, liquefied natural
gas and mining projects.
Finally, the party's plan to put government money behind
technology start-ups and invest in areas like clean technology
could benefit companies in those sectors.
LIBERAL MINORITY GOVERNMENT:
This scenario is also seen providing political stability
that would be welcomed by markets, Nomura analysts say.
Because they sit beside one another on the political
spectrum, many think the NDP could be convinced to support a
Liberal minority administration on many questions but they would
likely demand a price.
This scenario could raise questions around government
backing for TransCanada Corp 's TRP.TO Keystone XL pipeline.
The Liberals have come out in support of the project, while the
NDP have opposed it.
A Liberal-NDP combine would likely be negative for energy
companies given that both are in favor of tighter environmental
and carbon emission regulations.
CONSERVATIVE MINORITY GOVERNMENT:
This is widely viewed as the most unstable possible outcome
given the high likelihood that such a government could be
quickly toppled by the Liberals and the NDP, and a new election
may be called.
Many think this could weaken the Canadian dollar and
government bonds in the near term as investors would likely hate
an extended period of uncertainty, especially given the weak
state of the Canadian economy, which suffered two successive
quarters of negative growth in the first half of the year - for
many the technical definition of a recession.
"This scenario may take some weeks to unfold and it would be
some time before stability returned," said Nomura analyst
Charles St-Arnaud.
CONSERVATIVE MAJORITY GOVERNMENT:
A Conservative majority is seen by Bay Street - Canada's
financial hub - as positive for energy companies. The party
backs pipelines that would help get crude produced from oil
sands to global markets and likely narrow the discount to U.S.
crude and global oil prices.
Natixis analysts see a Conservative victory leading to lower
corporate and personal taxes, which could attract foreign
capital, especially in the manufacturing sector.
"Bay Street's preference is a conservative win as it
maintains the status quo. Markets hate uncertainty," said
Stephenson, of Stephenson & Co.
NDP MAJORITY GOVERNMENT:
This is highly unlikely given the NDP is trailing the
Liberals and the Conservatives in polls, and has been losing
support in recent weeks.
Canaccord analysts say an NDP majority government "would be
the most concerning scenario for energy stocks with the most
affected being the senior and integrated E&Ps (exploration and
production companies) and oil sands."
Canada's main stock index dropped about 1 percent in May
when the NDP's victory in oil-rich Alberta's provincial election
hit energy shares.
A federal NDP victory could also hurt the broader Canadian
stock market given the party's plans to raise corporate taxes on
large companies.
"If the NDP wins we would see a visceral reaction (from the
markets)," said RBC Capital Markets' Managing Director Paul
Hand.
Canaccord said the party's opposition to pipelines could
also lead to more oil-by-rail traffic, helping shares of
Canadian National Railway CNR.TO and Canadian Pacific Railway
CP.TO .
NDP MINORITY GOVERNMENT:
Also unlikely scenario. Given it would only be able to
govern effectively with Liberal support, the NDP's more radical
policies would likely be watered down. This outcome would likely
to similar to a minority Liberal administration.