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Prime minister Corbyn? The prospect for client portfolios

  • Learn what a hard-left government in power might look like.
  • Understand what impact Labour's manifesto might have on the economy and investments if they were in power.
  • Understand any similarities Mr Corbyn's policies have with the Conservative Budget and the impact John McDonnell might have as future chancellor.
CPD
Approx.30min
Prime minister Corbyn? The prospect for client portfolios

Whether you’re chanting it from a tent in Glastonbury, or howling it at Radio 4 in despair, the name Jeremy Corbyn tends to incite some rather impassioned reactions.

Some believe that, if he made it into No.10 Downing Street, Mr Corbyn’s bold new policies will usher in a more equal society, while others worry that his agenda will bankrupt the nation and drive businesses from these shores in droves.

After extensive analysis, we feel both are likely to be wrong. But there are a few risks. A Corbyn-led government would polarise people, and they are the ones who influence investments.

We take a look at the facts, as well as some fair bits of conjecture.

It’s hard finding a precedent of a hard-left government coming to power anywhere in the advanced world over the past 30 years. There have been plenty of left-leaning centrist governments, but they made no noticeable difference to share markets or bond yields.

The French example

If we go back a little further, however, we find one potential case: in 1981 Francois Mitterrand came to power in France touting an economic programme distilled from an alliance of socialist and communist parties.

All those policies that stir fear in capitalists were there: a wealth tax, significant expansion of the welfare state, a 10 per cent uplift in the minimum wage, an extra week’s holiday and the start of enforced annual pay negotiations between unions and industry.

He also went on a buying spree, nationalising an astonishing number of companies. By the end of his first year as president, the government owned 12 conglomerates, 36 banks and 2 financial services businesses, representing 8 per cent of GDP.

The markets hated it. The stockmarket tanked: just five weeks after the election, the French index had fallen 35 per cent relative to global equities.

Government bond spreads over bunds widened by 2 per cent almost overnight. At the time the franc was pegged to the German mark under the European Monetary System, a precursor to the euro, but the finance ministry was forced into successive devaluations to stem pressure on its foreign exchange reserves from capital outflows.

Now, this financial weakness regulated itself in a way that would make an economics professor blush with pride. Higher yields and a weaker currency attracted foreign capital, with money pouring in from 1982 onward. And the stockmarket actually recovered from its post-election slump, recouping its relative underperformance within eight months, even as Mr Mitterrand rolled out his left-wing agenda.

The French index was erratic though, with other significant falls amid strong runs.

It’s important to note, too, that Mr Mitterrand’s policies became more centrist as idealism buckled under the heavy weight of economic reality. At first, he focused on nationalising ailing, unprofitable businesses to protect jobs; it’s no surprise that they continued to haemorrhage money even under government control.

CPD
Approx.30min
  1. What impact does Mr Smith say past left-leaning centrist governments have had on share markets or bond yields?

  2. Five weeks after Francois Mitterrand was elected in France, how much had the French index fallen by relative to global equities?

  3. Which of the policies in Labour's manifesto does Mr Smith describe as "quite radical"

  4. Under a Corbyn-led government, Oxford Economics forecasts national debt would be around what percentage of GDP higher by 2020?

  5. Even if tax shortfalls from Labour’s plan are made up with higher borrowing, it is difficult to envisage the total debt ratio approaching anything like that of which two countries, according to Mr Smith?

  6. Mr Smith makes this statement about the Labour manifesto: "Most strikingly, most of the heavy cuts to working-age benefits proposed by successive Conservative Budgets are kept in place." True or false?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Learn what a hard-left government in power might look like.
  • Understand what impact Labour's manifesto might have on the economy and investments if they were in power.
  • Understand any similarities Mr Corbyn's policies have with the Conservative Budget and the impact John McDonnell might have as future chancellor.

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