Andrew Birt, director of investment at Saunderson House, sets out priorities for investors as Brexit uncertainty looms and the possibility of a Corbyn government draws ever closer
UK politics remain mired in uncertainty. While Brexit negotiations continue, Parliamentary arithmetic and a dissatisfied Conservative party continue to threaten Theresa May’s premiership.
Recent polls indicate that Jeremy Corbyn would be elected British Prime Minister if a general election was called. This has led to an increase in the number of reports suggesting Labour’s proposed policies would disproportionally harm the personal wealth of affluent individuals. We know that many are concerned about their financial futures.
But a change of government may not be as bad for investors as some fear. While there may be risk in the political uncertainty, today’s climate also creates opportunities for canny investors. Below, we explore the likely financial realities and investment opportunities that could be presented should Jeremy Corbyn be given the keys to 10 Downing Street.
Research we conducted last year revealed that more than two-fifths of high net worth individuals ranked the prospect of a change in UK government as one of the main threats to their finances. From conversations with our clients, it’s clear that this concern has not dissipated.
And perhaps with good reason. Newspapers frequently cite commentators warning of the danger posed by a wealth tax should Corbyn enter office. Such a levy could encourage capital flight, inhibit investment and lead to sterling depreciation.
Recent data suggest that global fund managers have also been put off by the UK’s political scene. Many managers have considerably underweighted UK investments, with the Reuters Global Asset Allocation poll for April showing that participating managers had just 6% of their balanced portfolios’ assets invested in UK equities, compared to an average of around 10% over the last five years.
Similar sentiment has also been demonstrated by domestic investors, with Investment Association figures showing UK retail investors pulled £843 million out of UK equity funds over the first quarter of 2019. In contrast, their flows into global equity and bond funds have soared, as have UK-based investors’ holdings of overseas domiciled funds.
These figures suggest that many investors are already positioning for a bleaker UK economy – and a weaker pound – that might result from a no-deal exit from the EU and the election of a Labour government. However, this might be too pessimistic. We estimate that Corbyn would need a majority of at least 40 MPs to pass more contentious legislation through Parliament. This is a large hurdle for a party that the four most recent polls suggest would command just a 27% voter share in a general election. Labour’s fate therefore hinges on the performance of the minor parties.
Without a clear majority, Corbyn may have to park his more radical taxation and redistribution policies, instead working with his own moderate MPs and those in other parties to increase investment in infrastructure, research and development, and education. Although this would likely be funded by higher government borrowing, it could be positive for the UK economy.
Whatever the political outcome, we suggest that investors place less emphasis on the noise surrounding hypothetical political changes and focus instead on company fundamentals as a guide to sound investment strategy when thinking about their personal wealth.
A firm’s business model and balance sheet, and the valuation of its shares, provide more objective indicators of potential future returns than where it happens to be listed. This is something that those selling UK equities may have missed – many UK-listed companies have robust businesses and balance sheets and are likely to still be around in a decade regardless of political shifts. Yet they are currently trading at substantial discounts compared to the valuations of their overseas peers. In our view, this is purely down to sentiment.
And if political events do cause the pound to weaken, shrewd investors could gain from this, as many UK-listed companies derive the majority of their revenues from overseas and could see their value rise in sterling terms. This may mean they perform similarly to global stocks but with the added advantage that they are, in some cases, already much cheaper to buy.
Furthermore, most investors saving for retirement have a time horizon of 20-30 years. This is a significant period. Looking back three decades, the Berlin Wall was still standing, Chinese economic reforms had barely started, and the internet was in its infancy. So, investors can be sure that there will be further changes before they realise the majority of their investments.
It is important to remember that this is all hypothetical – no general election has been called and Labour policies are still only proposals. But even if the current political volatility continues, it is worth remembering that what is bad for the economy is not necessarily bad for investors.
Therefore, we encourage investors not to get distracted. The most important thing is to keep flexibility and diversification within your portfolio.