I think the time has come for investors to give some long hard thought to what they should do with their portfolios in the event of a Labour Party government.
I am already on the record as suggesting that I think the party is now under the control of a crypto Marxist cabal who have managed to fool decent socialists into thinking that we just need a little bit more active social democracy. I think these sensible folk are being fooled by the core group around Corbyn who will reveal their true colours in government.
None of this would matter of course if the Tories were a more inviting prospect. But they aren’t. They are utterly fixated on Brexit and fighting their own petty internal squabbles, desperately hoping that a saviour will emerge from north of Border (she won’t). But what is even more depressing is that the Conservatives have no inspiring narrative – no uplifting story to tell about how they’ll make Britain a better place. In the absence of that vision, some sensible policies around more housing, cutting tuition fees and a sensible plan for spending more on key public services (particularly defence) might just work the trick but we’ll probably just get half measures and hot air.
So, my sense is that the odds of a Labour government are increasing by the day. Last week good old Len from Unite was telling the comrades that he thought there was a decent chance Jeremy would be in power by 2019. Traditionally I would have taken no notice of this self-serving guff from a trade union leader who has a wafer-thin democratic mandate and has been victimising his main opponent. But I think he may be on to something especially if Brexit doesn’t quite go according to plan.
So, what to do as an investor?
The first point to make is that I cannot for the life of me believe that Labour will win a comfortable majority. I can see them get to a 5 to 10 seat majority but that’s the very best result in my view. The more likely result would be just 5 or 10 seats below a majority which would require an alternative party to support them. Whoever that is, I cannot see a formal coalition emerging – the last one didn’t end well for the minor party. This introduces the likelihood that a Labour government would be a minority one dependent on fickle partners who are likely to act as a brake on the more extreme parts of the manifesto. The most likely coalition partners are the SNP, PC, and the Green Party. They will all be much less interested in groundbreaking Marxist radicalism and more focused on constitutional change where a Labour government might even be able to reach out to the Liberal Democrats.
The slightly alternative scenario is that the Labour Party does get a slim majority but even in this scenario, I suspect that PM Corbyn will very quickly find himself hemmed in by right-wing Labour MPs who will suddenly rediscover their spine after the forced retreat of the last few months.
Whatever the precise nature of the mandate my prediction is that economic policies will be of less importance to issues such as nationalisation, tuition fees, social and housing policy and a national education service (an excellent idea by the way). These are all vote-winning policies, which would enable the Labour government to build a coalition of support from both within the party and with outside partners. Crucially I suspect that the smaller parties might actually act as brakes on more controversial economic policies – for all its oft-stated radicalism, the SNP for instance, is a fairly middle of the road social democratic party which will react with horror to some of the more wild musings of Corbyn’s minions such Paul Mason. We might see support for the odd cooperative or the repeal of a few trade union laws but I suspect that will be it for the first few years.
But investors will be faced with some very specific portfolio issues.
On a macro level, I think that UK equities will be very volatile in terms of price as international investors begin to take in the likelihood of a Labour win. I would guess that ten-year bond yields would start to creep up and we could see those rates head above 2.5% and then 3%. Paradoxically though this pressure from global bond investors might force the Bank of England to open up QE again and try and resist a sudden increase in interest rates. Sterling could weaken again, perhaps pushing $1.20 and 1 euro to the pound. After the first wobbles in the equity markets, investors might even come to accept that an incoming Labour government will boost spending. This might feed through in the short term to improved consumer demand after the chaos of the first few weeks which in turn might help both UK consumer-focused stocks and global stocks with a strong dollar profits base. If I had to pin a number on the FTSE 100 I’d suggest that a 15% initial fall was possible in the run up to the election period followed by a 10 to 20% rebound within the first year.
But there will also be some major structural shifts. I personally would be looking to exit as many infrastructure funds as possible in the run up to a Labour government. A Corbyn premiership does not necessarily mean the end of the world for globally diversified infra funds, especially those in the sexier area of renewables, but it does mean huge regulatory uncertainty. Many infra managers love to say that Corbyn will need City money to build the social housing and new green energy plants. Maybe but I think a much simpler route is to set up a UK Infrastructure Investment Bank and fund the proceeds out of a form of peoples QE. Why bother with all complications of signing contracts with private sector providers?
I would also be heading for the exits with all utility stocks, including BT. As the recent Legatum Report on voters opinions to capitalism made clear, the vast majority of the UK population think water, rail, electricity and gas should be in public hands. By the time Labour are finished I think they’ll add large parts of BT to that list – especially OpenReach (which arguably should be in public hands anyway). Investors will love to fool themselves into thinking they’ll be richly rewarded for their confiscation – just like the Lords were paid off to end the slave trade in the 19th century. They won’t be. There is no way that an incoming Labour government can be expected to lavish money on investors for taking these assets back into public ownership – not when those bills for student fee reductions and the NHS come rolling in. So my guess is that the renationalisations will largely be punitive in nature even if they are rolling in practice i.e they won’t be all at once, with Labour choosing to selectively nationalise assets in the railway space first followed by water and power generation. More worryingly I think Labour’s more gradual nationalisation programme – step by step – will paralyse prices for the remaining private investors.
As for the big financial institutions such as the banks, I’ll think we’ll see much less volatility as the Treasury (or what remains of it after McDonnell has introduced his reforms) seeks to focus on reflating the economy through consumer spending – using the banks as the chief transmission mechanism. I’d heavily discount any attempt to take any bank into state control although I do think that Labour will be strongly tempted to take RBS firmly back under its wing and use it as an instrument of government policy. More generally I think Labour will be much more punitive about the Private Equity model – I can easily see a campaign of low-level intimidation emerge focused first on tax breaks and then on controversial M and A activity.
Of course, the long-term impact of all these policy shenanigans will be huge and divisive. At a time when China is steadily eating into the competitive advantage of the west, here we are stuck in the 19th century arguing about Brexit, marxism vs capitalism and wondering how we’re to pay for an ageing population with drastically reduced immigration. London, in particular, will feel the pain as Corbyn tries to (sensibly in this particular respect) re-orientate policies towards the regions (and especially the Midlands and the North). Many expats will flee the City and we could see real pressure on high-end housing. This will have a direct effect on both the Exchequer and on the London budget – I wouldn’t be surprised to see someone like Mayor Khan emerging as the ‘realistic’ face of Labour, challenging some of the more crazy ideas emerging out of Whitehall. But by then the long-term damage will have been done. The UK won’t seem such an attractive place for FDI and we’ll be more inward looking.
The odds are high that a Labour government won’t survive more than a few years and I’d guess that a revitalised Conservative Party, with new, young leaders, will come roaring back on a much more right wing, avowedly free market, nationalist agenda – and win the election convincingly by pulling middle of the road, university educated voters in their 30s and 40s to the right.