Election jitters hang over Bay Street

Business would ‘view tilt to right positively’

One thing Bay Street hates is uncertainty. And ahead of Thursday’s election in Ontario, there is plenty of that to go around.

Not only is the overall political direction of the largest provincial economy in Canada up for grabs, but there are individual policies proposed that could ripple through the markets and investors’ portfolios.

At this point in the race, polls have shown the rightleaning Progressive Conservatives and left-leaning New Democratic Party are the front-runners. The Liberals are running third in those same polls, with their leader Kathleen Wynne admitting this past weekend that she was pretty sure voters would not give her another term as premier on June 7.

Taxes are always an issue come election time. And the movement of Ontario’s corporate tax rate is naturally a closely watched thing for the businesses headquartered in the province, including some of the country’s largest financial institutions.

Progressive Conservative Leader Doug Ford has vowed to send the message that Ontario is “Open for Business,” in part by cutting the province’s corporate tax rate to 10.5 per cent from its current 11.5 per cent. But the PC pledges come with some uncertainty, as the Tory plans to pay for some of their promises remain murky.

“As per tradition, businesses are likely to view a tilt to the right positively, particularly given years of the opposite tendency plus the promise of a corporate tax cut,” said Eric Lascelles, chief economist for RBC Global Asset Management, in a Tuesday note. “However, with many uncosted Conservative promises on the table, an unfamiliar populist tilt to the party, and no clear path toward balancing the budget from either of the contending parties, one worries about the province’s fiscal position at a time when governments would normally be socking away surpluses for the next rainy day.”

The other front-runner in the upcoming vote is Ontario’s New Democratic Party and its leader, Andrea Horwath. Contrary to the PC position, one of the planks of the NDP platform is a commitment to hiking the tax rate on corporate profits to 13 per cent from 11.5 per cent.

“This is still lower than when the Liberals took power, and will put Ontario’s combined rate in line with the national average,” the platform says.

The effect on some of the province’s largest businesses could be minimal. While noting the province is home to the highest proportion of the Big Six banks’ lending activities and the largest percentage of their employees, excluding Quebec-based National Bank of Canada, National Bank Financial analyst Gabriel Dechaine estimated Monday that an NDP win could result in a relatively small hit to the earnings of the Big Six banks.

Under the NDP’s tax bump, the lenders could see a 0.7-per-cent average reduction to their earnings per share, Dechaine projected, “an amount that banks could easily offset in some way or fashion.”

One of the bigger implications of an NDP win, he suggested, could be the reaction of Corporate Canada.

“While EPS hit would be small, the broader economic impact could be more important,” Dechaine wrote. “It is plausible that business sentiment is negatively impacted, especially at a time when Canada and Ontario’s competitive positioning visà-vis the U.S. has appeared to weaken.”

The banks also do a good deal of business in the housing market, where the NDP is eyeing further regulation, such as a new housing speculation tax aimed at “foreign and domestic speculators who don’t pay taxes” in the province.

The party says non-Ontarian homeowners in and around the Greater Toronto Area, where the province’s 15-per-cent foreign-buyer tax is already applied, would be hit with an additional annual tax of $5 per $1,000 of the assessed value of their house. This would rise to $20 per $1,000 of assessed value in 2019, similar to what was done in British Columbia, the party said.

Ford and the Tories have said they would boost the supply of affordable housing across the GTA, and despite a video surfacing of the party leader vowing to “open up” part of Ontario’s Greenbelt, say they would protect the already protected area “in its entirety.”

But the various approaches have thrown another wrench at investors. A National Bank note recapping the real estate industry’s first quarter said the Ontario election “creates some risk that is frankly difficult to handicap.”

Electricity has also been a key issue in the election campaign. And Toronto-based

Hydro One Ltd., Ontario’s largest transmitter and distributor of electricity, has been directly in the crosshairs of the politicians.

Both the NDP and PCs have designs on Hydro One, nearly 53 per cent of which has been sold to investors by the Liberal government to fund infrastructure projects and debt repayments.

Horwath and the NDP have said they would like to return Hydro One to “public ownership.” Ford, meanwhile, has declared he would fire its board of directors and chief executive, Mayo Schmidt, whom Ford dubbed “The $6-million Man.”

Hydro One’s stock price has declined amid the political pressure. Shares of the utility, which is in the midst of an attempted $6.7-billion acquisition of U.S. energy company Avista Corp., have fallen by about 15 per cent for the year.

“The Ontario election ... will contribute to shareprice volatility over the next month or so,” predicted a CIBC World Markets note in May. “This may culminate in various scenarios with considerable uncertainty for shareholders.”

But the Liberals made a different kind of sortie into the capital markets during their time in power, creating another source of uncertainty. It began with the Grits announcing they would lower electricity bills by an average of 25 per cent using their “Fair Hydro Plan,” which involves borrowing around $2.5 billion annually over 10 years, the province’s Financial Accountability Office projected.

A so-called “Fair Hydro Trust” is tied to the plan and is managed by provincially owned Ontario Power Generation Inc. The trust completed its second public debt offering, of $400 million at a yield of 3.52 per cent, in April. Its fate is now tied to the election as well, with Bloomberg reporting this week that the Fair Hydro Trust notes tied to the plan have been rebuffed by some investors in that market.

Ratings agency DBRS said in April that the 30-year scope of the Fair Hydro Plan law “introduces some uncertainty regarding the longevity of the legislation.”

“Support from provincial leaders may change over time,” DBRS added, “which could lead to the repeal of, and/or amendments to, the legislation.”