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What will a Labour government mean for UK investors?

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What will a Labour government mean for UK investors?

‘Oh, Jeremy Corbyn,’ chanted to the tune of The White Stripes’ Seven Nation Army has become the anthem of the Corbynite left.

‘Oh, no. Jeremy Corbyn,’ however, maybe a more appropriate chant for UK-focused fund managers.

‘I remember the three day week and the miners’ strike, there were all sorts of horrendous things like rubbish in the streets,’ said Sue Round, who manages the Edentree Amity UK fund.

‘The Labour ideology then was so anti-City and it feels to me like some of the rhetoric coming out now is similar to those days.’

She is clearly not alone, with other managers sharing her concerns about having such a radically different type of government.

‘It would be a headwind for everything UK-related. I would expect the currency to fall and sectors like utilities and banks to suffer,’ said John Innes, manager of the RWC UK Focus fund.

Eric Moore, who runs the Miton Income fund, noted utilities have been quite weak because the rotation away from bond proxies was even worse than their global counterparts.

‘The obvious areas that will suffer are the ones that Corbyn has talked about nationalising. So transport, rail and the utilities,’ said Moore.

‘There is an element of Corbynitus coming into it. It is not very clear if you were to nationalise say United Utilities what the shareholders would get. Do they get the NAV [net asset value], the share price, or is it just nothing at all? It is very unclear at this stage.’

However, there is likely to be some shelter from the storm in the large cap names –especially those with overseas earnings.

‘I think there would be quite a rush to get out of sterling. So you would expect the overseas companies to do well,’ stated Innes.

This could lead to a similar situation to what happened in the months following the UK’s vote to leave the European Union, which saw large cap overseas focused companies outperform.

Moore agrees, that with the purse strings loosened sterling will probably fall: ‘The sectors set to benefit will probably be anything international. Internationally traded stocks like pharma and resources will probably benefit.’

He also highlighted that gold will be expected to see some positive moves off the back of a Labour government.

 

Brexit lessons

One of the lessons the UK has learned after Brexit is that the electorate is quite happy to vote on principles over economic security, while the result of the referendum left the government considerably weaker. 

‘The fragility of this government means there is a real threat that it could collapse, opening the way for Jeremy Corbyn’s Labour to take power in an early general election,’ said David Coombs, manager of the Rathbone Multi-Asset Portfolio funds.

‘The chances of this seem slim, but the potential effects are worrisome enough to keep this risk high up in investors’ minds.’

He regards a failure in the Brexit negotiations as the most likely spark for this tinderbox.

Coombs, like Innes, sees a fall in the value of sterling, however, he argues the outcome will be far more catastrophic.

‘We believe gilt yields would rise and sterling would fall dramatically as foreign investors may abandon UK assets wholesale. Domestic equities would be hit hard, both by rising import costs and a fall in businesses’ appetite to invest (hitting economic growth).

‘The ultimate result could be stagflation. If an election were called, we would avoid UK assets with extreme prejudice.’

But the extent to which the market is thinking about Corbyn currently is low, according to Moore. ‘If you were to take what Corbyn is saying on face value, then probably some sectors of the UK market should be lower and indeed the pound should be lower and bond yields should be higher.’

He pointed out that it is common for opposition parties to have some level of sabre rattling and noise and that often when in power, more radical policies are usually forgotten.

‘So maybe the bark will be worse than bite.’ 

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