We’re seeing some weakness in the Canadian dollar against the US dollar, a reaction to an underwhelming February gross domestic product reading and a sign of concern over the surge of the left-wing New Democratic Party (NDP) in the final days of polling ahead of Monday’s federal election.

As to the first count, Canada grew 0.5 percent in January but real GDP contracted by 0.2 percent in February. First-quarter growth, according to numbers crunched by the good folks at Worthwhile Canadian Initiative, is on track for an annualized rate 3.8 percent, solid in a vacuum, robust relative to Canada’s peers in the developed world.

As for the election, the Canadian domestic political situation remains a secondary concern for us. The primary driver of the Canadian economy is not policy from Ottawa. Rather, what will determine the course of the economy–as well as whether investing in Canada makes sense for Americans–is, in a word, China.

That’s not to say Stephen Harper’s Conservatives haven’t made choices that accentuate Canada’s natural positives. The Prime Minister and his minority government have proved responsible stewards leading up to and throughout an historically difficult period for the global economy and for investors looking to build wealth over the long term. Mr. Harper has earned the majority he covets.

Nevertheless, emerging-market hunger for natural resources, led by the Middle Kingdom, is showing no signs of abating. New middle classes across Asia are consuming the way their counterparts in the developed West do. And the Chinese government, in order to maintain social tranquility and thus single-party control, has to stimulate growth sufficient to feed, house and employ millions of people migrating toward coastal super cities.

This combination of organic factors and central planning is a strong, long-term positive for those investing in Canada, and it means that “good” (Harper), “bad” (Layton) or “indifferent” (the soon-to-be-residing-in-the-where-are-they-now-file leader of the Liberals Michael Ignatieff) foreign capital will find its way there. Strong terms of trade, provided the price of oil moderates as the geopolitical risk premium eases, should support the Canada story over the coming decade.

But the market has taken note of what will likely be an entertaining yet inconsequential historic anomaly. And Monday might be a great day for new investors to establish positions in high-yielding Canadian equities–including former Canadian income trusts that continue to pay generous dividends as corporations–ahead of fresh surge for the loonie. International observers are a little spooked by the specter of social democrats taking power from free-market conservatives. That tension will restrain new buying until at least Tuesday, perhaps longer depending upon what happens Monday during the only poll that matters. If things really go sideways we may see opportunities around “dream prices” for our Canadian Edge Portfolio Holdings.

Investing in Canada: Polls, Possibilities, Probabilities

Things went from routine to radical over the course of about 10 days in the campaign, as the NDP, under the charismatic leadership of Jack Layton, has overtaken the Liberal Party of Canada and surged within 5.2 points of Mr. Harper’s Tories.

Mr. Harper will likely extend his run as the longest-serving prime minister of a minority government, but Mr. Layton is, conservatively at this point, an even-odds bet to become the main spokesman of the official opposition. Although the NDP has closed to within what seems striking distance of the Conservatives in the nationwide three-day tracking poll, the left-wing upstart seems to have ridden a west-moving wave that’s crested in British Columbia.

Polling for the three days concluded Thursday, Apr. 28, shows NDP momentum stalling in Atlantic Canada and Quebec, where much of its gains from Apr. 17 onward were made. The NDP and the Liberals continue to claw back support in Ontario, where the Conservatives fell from 41.2 percent to 36.3 percent from Thursday morning’s tracker to Friday’s. In BC the NDP is up to 35.3 percent from 26.9 on Thursday, while the Tories dipped from 45.3 percent to 43.

It’s important to note that Stephen Harper’s party leads in every province/region but Quebec. Even more important is the fact that this is a riding-by-riding race. According to Friday morning’s updated projection at ThreeHundredEight.com, even factoring in recent weakness the Conservatives are on track to hold 144 seats in the 41st Parliament, one more than they held at the conclusion of the 40th. For all the drama surrounding Mr. Layton’s “orange wave” his party will pick up 17 seats, for a total of 53. The floundering Liberals should enjoy the charity of Canada’s “first-past-the-post,” riding-by-riding system and keep a grip on 70 seats, down from 77 at dissolution of the previous Parliament.

The range of reasonable outcomes now includes losses of seats by the Tories sufficient to undermine its claim to another minority government, which would likely then lead to a coalition among the NDP and the Liberals, with Mr. Layton assuming the prime ministership.

This remains a longshot, but prudence–and the relative underperformance of the S&P/Toronto Stock Exchange Composite Index versus other country-specific indexes during the NDP’s rise–suggests we get to know Mr. Layton and the potential policy wrinkles his entry onto the big state might bring.

The last 10 days’ polling suggests, at a minimum, that Canadians are open to handing over the keys to a left-wing, social democratic government. Canadians love their health care–it’s the No. 1 issue, according to voters surveyed in the Nanos Research three-day tracking poll, and that’s in response to an unprompted question–and Mr. Layton is the only serious challenger for the prime ministership who has committed to a universal, public system.

Mr. Layton, a former professor and social activist, used to wear jeans to Toronto city council meetings, and it took him awhile to find a comb for grooming before those gatherings. He’s a likable guy and has consistently polled higher personally than his party. In fact he now leads the leadership index compiled by Nanos Research by 12 points over Mr. Harper.

Potential implications, from a foreign investor’s perspective, of a Layton prime ministership include an end to corporate tax cuts, although the NDP platform indicates it would favor lower rates than those found in the US; federal government resistance to oil sands development; and pursuit of cap-and-trade legislation. Purely domestic considerations include his past favorable disposition toward allowing Quebec its independence; potential support for a ban on private health care in Canada, a condition he demanded in return for continuing support of a minority Liberal government in November 2005, which move broke the ground on the road that led to Stephen Harper’s first government; and a proposal to cap credit card rates in order to reduce credit card debt.

The base case remains a stronger Harper minority. A split of the left-leaning vote would mean a majority government for the Conservatives. The worst-case: The New Democrats overtake the Liberals, win 100-plus seats, and the Conservatives lose seats, falling perhaps to the 130 level. Under such a scenario the NDP’s Jack Layton could rightfully claim leadership of a minority coalition between his party and Mr. Ignatieff’s Grits.

This would be an unstable short-term situation. The upstart NDP has no history in power, much less in the role of official opposition. There would be no end to speculation about what happens next with the Grits, when “heir apparent” Justin Trudeau would finally be able to assume his rightful position, what this means for a Prime Minister Layton, and how the ambitious Mr. Harper might strike back.

If politics is the art of the possible, it’s first an art. And when it comes to art, beauty matters. Mr. Layton is basking in this reality during the final sprint to May 2’s election. But his reward is likely to be unseating a Liberal Party he’s long done battle with.

Canada’s record over the past two decades, dating to its serious, aggressive and effective effort to get its fiscal house in order in the early 1990s, continuing through the way it’s negotiating still-roiling global economic waters first stirred by the US subprime meltdown in 2007, is, crudely, one of zigging while others zagged.

For years we’ve argued that Canada’s resource wealth and relative stability set it apart from its developed market peers. We’ve also lauded the responsible leadership, from an American investor’s perspective, of Mr. Harper’s minority Conservative government. Setting aside the fraught income trust file, we’re still looking at one of the most hospitable environments for foreign investors on the planet.

Its moves have placed it outside the complex of boxes that hold in developed-world economies. This latest counter-move–as countries on the edge of Europe install right-leaning populists and others at the core implement austerity programs–is merely a feint worthy of study, not worry, and it could create a buying opportunity.

The Roundup

Statistics Canada’s February GDP report–showing the first decline in five months–left a lot of observers, including those who anticipated an annualized growth rate of 3.1 percent, wanting for explanation. Here are few factors–detailed in StatsCan’s Friday morning report–that led to the downside surprise:

• declines of 1.6 percent and 1 percent in manufacturing and wholesale output, respectively, while transportation and warehousing also declined 0.7 percent each;
• the US, still Canada’s biggest trading partner, underperformed versus expectations during the first quarter;
• the strength of the Canadian dollar–and the loonie is even stronger now–hurt some exporters;
• the services sector was flat in February, neither hurting nor helping overall GDP;
• services sector components wholesale trade, public administration and transportation all declined;
• retail trade (up 0.6 percent) and strong professional services (0.3 percent) and financial services (0.2 percent) mitigated some of the negativity;
• the goods sector, which includes industries that turn raw goods into products that can be handled or stored, contracted 0.6 percent.

What matters most–more than the view from 30,000 feet–is what’s happening on the ground at the companies we own and rely upon for regular dividend payments. Developments at this level are what matter most for long-term wealth-building. And two Portfolio mainstays have reported very positive moves that will support payout sustainability and growth.

“When Canadians think of movies,” said CEO Ellis Jacob during last week’s announcement of a deal with 20th Century Fox, producer of the well received Black Swan and owner of the X-Men catalog, to distribute these and other studio-controlled films through his company’s digital download service, “we want them to think of Cineplex (TSX: CGX, OTC: CGXPF).” Cineplex.com users will now be able to download 20th Century Fox titles to a hard drive or an online digital “locker” the same day they’re available on DVD or Blu-Ray. It’s yet another small but consequential move for the theater operator, as is the acquisition of New Way Sales Games, an arcade game supplier. This is more evidence that management understands the limitations on its growth potential in its core operation–Cineplex, with 1,300 screens coast to coast, already dominates the market; opportunities are in higher-margin 3D and IMAX screenings and in designing and executing innovative ways to monetize space in its theaters. Arcade games feature prominently in lobby spaces throughout the Cineplex theater chain and are another way to extract more money per attendee. Efforts such as these help mitigate the impact of slower box office numbers.

Conservative Holding Cineplex, which will announce first-quarter earnings May 12, is a buy if it dips below USD23.

Longtime Conservative holding TransForce (TSX: TFI, OTC: TFIFF) is paying CAD25 million for DHL Express Canada’s domestic shipping business. The move helps TransForce boost its package-and-courier presence in western Canada, and it could be a jumping-off point for the trucker’s expansion into higher-margin international operations.

Management said during a conference call to discuss the deal that it has no plans to make any more acquisitions this year. TransForce made four deals in 2010, taking advantage of low interest rates to piece together more assets in a still-fragmented North American logistics industry.

Although the dollar size of the deal is relatively small–TransForce paid USD248 million in late 2010 for Texas-based Dynamex, which provides same-day delivery services for businesses in the US and Canada–the impact could be significant: TransForce expects the deal to add annual revenue of more than CAD275 million. TransForce had annual revenue of more than CAD2 billion in 2010.

TransForce will operate the DHL assets under Loomis Express, a new unit that will be managed by carryovers from DHL Express existing domestic team. TransForce and DHL Express have agreed to a 10-year strategic alliance to provide domestic and international shipping and logistics services.

Management will now turn its attention to bringing the company’s debt level down from about CAD830 million, including the Dynamex and DHL deals, to about CAD700 million by the end of 2011.

TransForce continues to reorient its business in a manner that leaves it less exposed to traditional trucking businesses like truckload, freight and less-than-truckload, all of which were hit hard during the recession.

The DHL deal is expected to close in a month. TransForce is a buy up to USD14.

Following are first-quarter earnings reporting dates for Canadian Edge Portfolio Holdings.

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–May 2 (confirmed)
• Ag Growth International (TSX: AFN, OTC: AGGZF)–May 13 (estimate)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–May 5 (estimate)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–May 10 (estimate)
• Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)–May 6 (estimate)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Apr. 29 (estimate)
• Enerplus Corp (TSX: ERF, NYSE: ERF)–May 13 (confirmed)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–May 10 (estimate)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–Apr. 29 (estimate)
• Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–May 5 (confirmed)
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–May 10 (estimate)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–May 12 (estimate)
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–May 6 (estimate)
• Provident Energy Ltd (TSX: PVE, NYSE: PVX)–May 5 (estimate)
• Vermillion Energy Inc (TSX: VET, OTC: VEMTF)–May 6 (estimate)
• Yellow Media Inc (TSX: YLO, OTC: YLWPF)–May 5 (tentative)

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–May 5 (confirmed)
• Artis REIT (TSX: AX-U, OTC: ARESF)–May 12 (estimate)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–May 11 (confirmed)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–May 10 (estimate)
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–May 12 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–May 9 (confirmed)
• Capstone Infrastructure Corp/Macquarie Infrastructure Corp (TSX: CSE, OTC: MCQPF)–May 11 (estimate)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–May 12 (confirmed)
• CML Healthcare Inc (TSX: CLC, OTC: CMHIF)–May 5 (estimate)
• Colabor Group (TSX: GCL, OTC: COLFF)–Apr. 28 (estimate)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–May 10 (confirmed)
• Extendicare REIT (TSX: EXE-U, OTC: EXETF)–May 6 (estimate)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–May 6 (estimate)
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)–May 10 (estimate)
• Just Energy Group Inc (TSX: JE, OTC: JSTEF)–May 20 (estimate)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–May 10 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Jun. 14 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–May 6 (estimate)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–May 19 (confirmed)
• TransForce (TSX: TFI, OTC: TFIFF)–May 17 (confirmed)