“Ontario is open for business”

Jun 08, 2018 | Dian Chaaban


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Doug Ford led the Progressive Conservative Party of Ontario to a decisive victory last night, securing a majority government, winning 76 seats of the available 124 with 40% of the popular vote—9 percentage points more than the PCs won in 2014.

While Ford gained support in every part of the province, his path to victory ran through the greater Toronto region, where he erased the Liberals from the suburban “905” political map and added 11 seats in the city itself. Unsurprisingly, the NDP came in second with 40 seats (making them the official opposition and Andrea Horwath the official opposition leader), while the Liberals were totally decimated, losing 50 seats and winning a paltry 7 (and in turn, losing official party status). It was a historic night for the Green party, which won its first-ever seat in Ontario Legislature (leader Mike Schreiner won in Guelph.)

There’s lots to unpack in the weeks ahead, but the foundation of Ford’s campaign was tax cuts, both for individuals and business, and that was a key theme from his victory address last night. Here are some highlights of the measures Ford has promised to implement:

  • Cutting the corporate tax rate from 11.5 per cent to 10.5%
  • Cutting the small business tax rate from 3.5 per cent to 3.2%
  • Scrapping the Liberals’ planned minimum wage hike from $14 to $15
  • Cut gasoline taxes by 10 cents per litre
  • Scrap Ontario’s existing carbon cap and trade system (as well as opposing a federal carbon price)
  • Boost transportation infrastructure in Northern Ontario, aimed at supporting mining developments such as Ring of Fire

Doug Ford promised change - and even before he forms a cabinet, Ford will have to get to work as early as this weekend to address the U.S. tariffs that threaten steelmakers and the auto sector. He’ll then have to craft a budget or economic statement. And while taxes will be the centerpiece - “Ontario is open for business,” he said last night - it’s unclear how he’ll attack the province’s massive debt without rethinking health and education spending. He’ll face equal trouble restructuring gas and hydro prices without first challenging Ottawa’s mandatory carbon pricing plan, something other provinces may want him to do.

As our RBC Thought Leader John Stackhouse wrote in his commentary this morning, a court fight may be inevitable, which would position Ford, a rookie on the national stage, as Justin Trudeau’s leading antagonist. And this in a province where the federal Liberals hold 80 of their 184 seats. Small wonder that with a federal election next year, Ford’s overwhelming victory has everyone wondering about change…

With all of this change and uncertainty at home, trade tensions heating up in Quebec as the G7 summit commences (now being dubbed the ‘G6 +1’ because of POTUS wanting to leave early), the BoC strongly hinting at a rate hike in July and geo-political concerns from Asia to Europe, one wouldn’t blame the average investor for sitting on the sidelines and “waiting it out” – but Warren Buffett and Jamie Dimon called us out in an op-ed yesterday in the Wall Street Journal making a case for focusing on the long term. It wasn’t the first time the two friends have argued against short-termism; they did so in 2016 in a widely circulated ode to “common sense corporate governance” signed by more than a dozen business leaders.

This time around, the executives urged publicly traded companies to stop providing quarterly EPS guidance, arguing an “unhealthy focus” on meeting short-term financial targets is discouraging longer-term business investment and even holding back some companies from going public; "When companies get where they're sort of living by so-called making the numbers, they do a lot of things that really are counter to the long-term interests of the business," Buffett said.

Critics of the practice suggest that quarterly earnings guidance sets up executives to focus on the short-term and act in ways they might not have acted otherwise – which I think is an interesting parallel to our political campaigns – short-term promises to get elected and medium term goals to stay in the lime light ….but is anyone thinking about what’s best for us longer-term?

While it’s hard to disagree with these two, I’d argue that this short-termism is a necessary evil for buying good quality businesses on sale. The basic concept behind value investing is such that if you know the true value of something, you can save a lot of money if you only buy it on sale. So, if you own a good quality business that you love and it is about to report earnings – root for bad news – because you want the market to sell it off so that you can buy more on sale. A great example of that this week was Dollarama (one of my fav stocks) who missed on their earnings because of the ‘cold weather’ giving rightful owners of the stock an opportunity to buy in (or buy more) at a discount.

Now you are in-the-know with Word on the Street.

Enjoy your weekend,

D.

Dian Chaaban
Investment & Wealth Advisor
416.842.4234