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Why the current political gridlock is good for investors

Tom Stevenson

Tom Stevenson - Investment Director

This article first appeared in the Telegraph


One of the ironies of our clumsy attempt to leave the EU is that we are quitting Europe only to see our politics become ever more European. Remember how we sneered at the continental model, ungovernable countries lurching from one unstable coalition to the next. Our confrontational two-party system at least had the merit of electing governments with a mandate to deliver their manifesto promises. Well, we’re all Italians now.

We are nearly a decade into Britain’s new era of government by fudge and compromise and there is no sign of an early return to the familiar pendulum politics of old. Kicking one lot out until we got fed up with their replacements and started again was a pretty good system. But it’s gone for now thanks to the four-way split between Left and Right on one axis and Leave and Remain on the other.

In today’s fragmented and polarised political landscape, the chance of any party achieving a majority in Parliament is vanishingly small. While this might not be appealing from a political perspective, promising perpetual marriages of love-less convenience, viewed through the prism of the markets it could be a whole lot worse. Gridlock is good.

The timing of the next election is likely to ensure a continuation of this politically chaotic but investor-friendly environment. That’s because the Remain alliance has rightly identified delay as the key to foiling the Prime Minister’s ‘do or die’ Brexit ambitions. By holding off until after the enforced extension request in late October, the opposition parties believe they can split the Leave vote. The polls for a pre-EU-summit election are massively more favourable to the Government than those for one in November, which put Labour and the Conservatives neck and neck as the Brexit Party bounces back into contention.

The reason this is a good outcome for investors is that a No Deal Brexit and a Labour government are equally unpalatable. Both promise economic shocks that would likely hammer the pound and the stock market.

The Bank of England may have reined in its worst expectations for the impact of No Deal, but the numbers remain sobering. The central bank now projects a 5.5% reduction in GDP, a doubling in unemployment to 7% and inflation back above 5%. That may be better than last November’s forecast, but it would still be devastating.

Perhaps not so damaging, however, as the fundamental re-shaping of the British economy proposed by Labour’s shadow Chancellor John McDonnell. His message to high-earners, property-owners and investors is clear: change is coming.

The scale of Labour’s proposals is breath-taking. They constitute a radical re-writing of the past 40 years’ economic orthodoxy. Some rethinking of the Thatcherite creed may well be overdue, but no-one should underestimate the revolution that lies in wait if Labour wins this autumn’s election.

Get ready for: widespread nationalisation of rail, utilities and mail; higher taxes on the wealthy; the forced transfer of shares in big companies to their workers; fewer incentives to own property; and massive borrowing to fund investment in infrastructure. Labour makes no secret of the fact that shareholders will not receive anywhere near market-value for their stakes in nationalised companies.

At the heart of Labour’s plans is redistribution. Wealth and power will flow from owners to workers, landlords to tenants, and from capital to labour. Pay-caps, capital controls, universal basic incomes, union power - some new concepts and plenty of reheated ones from the 1970s could soon be part of the national debate.

This is the moment the hard left has been waiting for. The financial crisis and the policy response to it largely favoured the owners of assets. They deepened existing inequalities and created the circumstances in which Labour’s long list of radical measures might be acceptable if not outright attractive to enough voters for the party to scrape home with a workable majority.

But Corbyn and McDonnell risk over-reaching themselves in exactly the way that Boris Johnson and Dominic Cummings appear to have. Not many of us remember the 1970s but enough do to make mainstream voters blanch at the prospect of a £300bn raid on pension funds, the public naming and shaming of high earners, a ban on share options and bonuses, enforced delisting of environmentally-dubious companies, the taxation of capital gains on your house and financial transactions, and a spike in the tax on company profits.

The good news for investors is that both mainstream parties seem to have forgotten that the most direct path to Downing Street is down the middle of the road. The chance of pushing through even a fraction of Labour’s radical agenda is slim in the absence of a sustainable majority. And the polls make that look implausible right now.

Investment is a balancing of probabilities. As long as No Deal or a Corbyn-led Labour government remain possibilities, we should seek to protect our portfolios to the extent we can. Fortunately, the value of UK assets has already priced in much bad news. The $200m inflow into UK-focused mutual funds last week was the first time in three months that money had not poured out of British investments. It showed that investors have not given up completely on our out-of-favour market.

But this is not the time for bold calls. The UK accounts for about 6% of the overall value of global stock markets. If it represents a much bigger proportion of your investments, you should ask yourself why. All that remains then is to hope that the election, when it comes, continues to offer more questions than answers.

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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