Investors in British shares have got used to fearing the worst. The past three years have seen a constant drip-feed of anxiety about what Brexit might mean for the UK economy. Unsurprisingly, London is pretty low on the list of overseas’ investors preferred stock markets.
But maybe we’ve been looking the wrong way. Arguably, the biggest concern for UK investors should not be a disorderly departure from the EU (it is after all unclear that we are even going to leave at this point). Rather, investors might be better off considering the implications of a Labour government if the collateral damage from botched Brexit turns out to include both Theresa May and the Conservative party at an early general election.
At a client event last night for Fidelity personal investors, there was no shortage of talk about what Jeremy Corbyn and his likely Chancellor, John McDonnell, would mean for portfolios and personal finances. On neither front was their much cause for optimism.
When it comes to personal taxation, the views of Corbyn and McDonnell are well known. It is unlikely that they would consider 45% to be an acceptable top rate of income tax. And capital gains tax would almost certainly come under the spotlight were Labour to get hold of the keys to Downing Street.
There is also little doubt that Labour would train its sights on a handful of sectors that it believes are better served by public ownership. Labour has already laid out radical plans to re-nationalise a few major industries including gas and electricity, water, the railways and postal services.
Customers of all of these might be forgiven for thinking life under public ownership could hardly be worse than their experience since privatisation in the 1980s and 1990s. They should be careful what they wish for. Memories of British Rail and the Gas Board are fading into sepia-tinted nostalgia. For those old enough to remember, they were certainly not the good old days.
It’s not just what Labour might nationalise that matters. How they would go about it is important too. And here there is also genuine cause for concern.
For example, Labour has floated the idea of buying back assets at less than their current market value. It’s justification for this is woolly, suggesting that the private owners of the businesses have unfairly profited from asset-stripping and the like. It has quoted £15bn as a fair price tag for the water industry - others put it at £44bn, or £90bn including debt.
It is hard to overstate the impact this kind of confiscation would have on Britain’s reputation as a safe and fair destination for overseas investors. When previous Labour administrations took industries back into public ownership under Attlee and Wilson, they paid a fair market price. Not doing so would be pretty much unprecedented outside of countries such as Venezuela and Zimbabwe that we would probably prefer not to be compared to.
For investors, large-scale nationalisation would also take away an important source of income. With companies like Vodafone already cutting dividends the pressure on pensioners’ incomes would be significant.
Other considerations include the impact rolling back private ownership would have on the state of Britain’s infrastructure. We have already seen the impact that austerity has had on basic services like street cleaning and pothole repairs. Cash-strapped governments will always look for ways to save money and ongoing maintenance is an easy short-term decision and a disastrous long-term one.
Finally, it is worth asking whether the state would invest in the alternative fuels we need to meet our carbon commitments or the transport links that will drive our competitiveness in future.
What the wider implications for British investors beyond this handful of industries might be is hard to predict. A Labour government would almost certainly increase pressure on the pound, although as we know this is not necessarily a negative for the internationally-focused UK stock market.
The good news is that sentiment towards UK assets has already been hit by the negative cocktail of Brexit and fears over a Labour government. Valuations of British shares are undemanding both historically and relative to other markets.
Fidelity’s Select 50 has a good range of UK funds, offering a mixture of investment styles, a focus on both income and growth and across the size spectrum.
Two of our favourites on the list are:
Fidelity Special Situations, run by Alex Wright, which has a heavy weighting towards oil and gas and financials. There are no utilities in the fund’s top ten holdings.
Lindsell Train UK Equity, managed by Nick Train. Again, the main holdings of this concentrated, growth-focused fund look like a Corbyn-free zone.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Reference to specific securities or funds should not be construed as a recommendation to buy or sell these securities or funds and is included for the purposes of illustration only. The Select 50 is not a recommendation to buy or sell a fund. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.