Investors may face rough ride if Canadian election leads to political instability

Mon Oct 19, 2015 12:01am EDT
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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: