The increased chance of a Labour government have not been properly priced in by UK equity investors, commentators have warned, as they point to the greater investment risks facing utilities and other sectors.
This month’s general election saw Theresa May’s Conservative party fail to secure a majority, increasing the odds a new election could be called. Investor attention has concentrated on what the result means for Brexit negotiations – as Investment Adviser reported last week.
But with Labour continuing to surge in the polls, strategists have suggested markets should consider the impact of policies such as taking water companies and energy supply networks into public ownership.
Trevor Greetham, head of multi-asset at Royal London Asset Management, said sectors could significantly derate if the prospect of nationalisation became more obvious.
He said: “If the vote had come out where the Conservatives could not form a government, if it had been a progressive alliance then there would have been a very big move, a much bigger reaction. It’s easy to underestimate just how unexpected this was. Over the next weeks and months, if it looks like the Conservatives will lose their working majority, I think you will see a very big reaction.”
A tougher outlook for utilities would have to be weighed against the sector’s current prosperity: share prices have risen in part because it is seen as a safe haven when the UK’s future path is uncertain pending Brexit negotiations.
David Coombs, multi-asset head at Rathbones, said: “The risk is there. There probably should be a small discount that could increase as the likelihood of [Labour leader Jeremy] Corbyn winning increases.”
He said other sectors should also warrant renewed analysis.
“Transport and energy could be most affected, but also telecoms. Once the government starts interfering, then there’s the banking sector which is unpopular. Any sector that is underperforming for the public or becomes unpopular [could be affected by broader intervention]. You could get heightened regulation.”
In a note to investors, Citi analyst Jonathan Stubbs suggested “nationalisation risk, higher corporate tax risk and concerns over economic direction” were among the consequences of a potential Labour victory. Other analysts believe the party’s approach would have to be moderated. JPMorgan, in a note prior to the election result on June 6, said nationalisation moves would likely “end up in the courts”, and instead predicted a severe tightening of regulation or a “Blairite windfall tax”.
Simon Evan-Cook, a multi-asset manager for Premier, said: “There are questions about the degree to which investors are compensated [in the event of nationalisation].”
The debate comes as part of a broader reassessment of the political risks still on the agenda for investors, following on from the political shocks of 2016.
Commenting on the June 8 result, Schroders UK equity manager David Docherty said: “Investors will have to start calibrating the impact of Labour now being closer to power than anybody thought, so just trying to understand better their potential policies on nationalisation, tax, the minimum wage.”