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Keep calm about Corbyn: what could he actually do?

Keep calm about Corbyn: what could he actually do?

David Smith, manager of Henderson High Income (HHI), has urged investors keep some perspective on the possiblility of the Labour party forming the next government.

Smith acknowledged there was a good chance of Labour coming into power under left-wing leader Jeremy Corbyn and implementing policies ‘not exactly friendly’ for certain UK businesses, including the renationalisation of industries such as utilities, post and rail.

‘I think what you have got to equally think about what is the likelihood that can he actually renationalise them?’ he asked. ‘If Labour do get into government will it be as a majority or do they have to form a coalition? If they form a coalition, will the other parties involved be really that willing to renationalise the industries?’

Smith added: ‘If you talk about the utilities sector, I mean there are obviously various treaties in place with various overseas governments and overseas investors that if this process happens the UK will have to pay a fair price.

‘I think no one has really defined what that fair price is but if you value the utilities sector on an asset-type basis, those companies are trading quite close to that value at the moment. 

‘It's a risk we've need to be aware of it but you've always got to put it in perspective of what they can and can't do.’  

The recent parliamentary deadlock over Brexit prompted Conservative prime minister Theresa May to state that she would step down when a deal was ratified, with EU officials granting the UK a new deadline of 31 October to settle on a departure agreement. Conservative and Labour have held cross-party talks to try to break the impasse.

Foreign secretary Jeremy Hunt has said it is an ‘absolute priority’ for the government to leave the trading bloc by 23 May to avoid taking part in European elections, which could result in a general election and a win for Labour if the Conservatives are punished for the government’s handling of the Brexit negotiations.

However, Labour’s leader in the European parliament, Richard Corbett, has warned the party may also ‘haemorrhage’ votes if it does not back a second EU referendum.

Whatever the outcome, Smith urged investors not to dismiss domestic cyclical stocks, such as utilities, altogether but to instead avoid being too overweight and focus on selecting the high yielding, good value stocks within this group. He also recommended combining this with more global high yielders such as pharmaceutical companies and tobacco producers.

Pharmaceutical giants GlaxoSmithKline (GSK) and AstraZeneca (AZN) are both top 10 10 holdings in his £213 million trust, accounting for 3.2% and 3% of the portfolio respectively. Tobacco firms Imperial Brands (IMB) and British American Tobacco (BATS), meanwhile, represented 2.5% and 2.4% respective positions in the trust.

Getting defensive

Smith (pictured) has begun positioning the trust more defensively as markets showed late economic cycle characteristics, upping exposure to bonds.

Since the end of 2017, the trust’s weighting to bonds has gone from 10% of the portfolio to around 15%, with many of the newer purchases in the higher grade US corporate bond market thanks to attractive yields. This included buying bonds from online shopping platform Amazon (AMZN.O), fast food chain McDonald’s (MCD.N) and cable company Comcast (CMCSA.O)

‘The fund’s ability to invest in bonds has been well-utilised in the past year and exposure to fixed income products is unlikely to increase further. In our view, this flexibility is a valuable differentiator from its many UK equity income peers,’ said Winterflood research analyst Annabel Herman. 

The trust suffered in the stock market panic at the end of 2018, ending the year with net asset value total returns down by nearly 14%, underperforming a return of 8% from its composite index.

But it still continued to perform in terms of providing stable income, yielding 6%, with annualised dividend growth of just less than 3% annualised growth and nine months-worth of revenue reserves.

The shares trade on a discount of 4.5% to net asset value in contrast to their more normal small premium of around 2% above NAV.

‘In our opinion, this represents an attractive entry point, particularly given that the fund has tended to trade at a premium for most of its recent history,’ said Herman. ‘However, we would highlight that downside discount risk remains due to the lack of any formal discount control mechanism.’ 

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