Sorry to say, but Brexit may be just the start of it…
ref: - "FT BIG READ – THE CORBYN REVOLUTION", The Financial Times
One of the more redundant introductions must be: "It's a big week for Brexit this week…”. They're ALL big weeks, but it's true that we are approaching what promises to be another explosive chapter in the apparently endless saga of Brexit. If nothing else many will hope that, come what may, it will be the final chapter. Frankly, that seems unlikely. If we've learnt anything at all from this nightmare it's that whatever pans out on October 31st it would be foolish to assume that the "losing" side will meekly accept that the argument has been lost.
Apart from the growing prospect of a no-deal Brexit that most economists argue would inflict serious damage to the UK economy, we are also faced with a Prime Minister accused in some quarters of committing an assault on British parliamentary democracy and stability which for so long, rightly or wrongly, has been viewed as something of an example for the world. Moreover, Mr Johnson is now threatening to punish all Conservative MPs who do not support him in tomorrow's vote by "withdrawing the whip"… effectively kicking them out of the parliamentary party, and having them de-selected before the next general election. Those who might fall foul of the Prime Minister in this way include some very senior figures who until very recently were cabinet colleagues of the PM.
It's not surprising the British Pound has been so undermined by the deteriorating chances of an agreed Brexit deal and the chaotic political scene at Westminster. The FTSE 100 has held pretty well but that's largely because so many of the companies quoted on it benefit from a weaker pound. Gilts have been buoyed by the global rush into government debt (especially when it carries positive yields) and the prospect of easier monetary policy in the face of post-Brexit recession. But there is a possible scenario for the UK that would be likely to affect UK assets in a much more serious manner than even Brexit, and that would be a victory for Jeremy Corbyn's Labour Party in a general election. The FT is embarking on a series of articles examining what that might mean, and anyone with any exposure to UK assets would be advised to consider what they say at the very least.
Now, leave aside any personal political preferences… we're talking purely of how the markets might react to such a development. Mr Corbyn is, by modern standards, a man of the Hard Left. His inner circle includes those form Momentum, the radical and militant faction within the Labour Party. His putative Chancellor of the Exchequer is John McDonnell, an open Trotskyite in his younger days. Mr McDonnell may have reined back his rhetoric a touch to be more in keeping with the status of a front-bench spokesman but nobody doubts his continuing allegiance to hard-left policies… and it is Mr Mc Donnell who has drawn up Labour's economic strategy.
In some ways the timing is fortuitous. Capitalism, or rather the excesses perpetrated in its name, is under attack and it would be hard for any politician to argue that at the very least it needs some modification. But Labour promises nothing short of an economic revolution. If there was one single theme that described what's at the heart of policy, one word even, it would be "redistribution". To quote the FT: "Redistribution of income, assets, ownership and power. The mission is to shift power from capital to labour, wresting control from shareholders, landlords and other vested interests and putting it in the hands of workers, consumers and tenants".
Plans include the nationalisation of rail, water, mail and electricity distribution companies (how? and at what price for the current shareholders?). Income tax on the wealthy will be significantly higher. Every large company will be forced to transfer 10% of shares to the workforce. There will be massive government borrowing to fund spending. Also, on the cards: a four-day week, pay caps on executives, an end to City bonuses, and a universal basic income.
Maybe this is the way forward, we don't know… but we think we know what investors would make of it, and how they would vote with their feet. At that stage dealing in a post-Brexit world might be the least of the UK's problems.
How likely is it? A general election in the UK this year is odds-on. The chances of a Labour victory? The Oddschecker website reports that bookmakers' odds of that happening range between 3-1 and 4-1 AGAINST. It's rarely a good idea to argue with bookies but instinctively those odds feel a little too long. Perhaps they feel that this version of the Labour party is SO radically to the left that the British voting majority that has historically revolved around moderate centre-ground could not stomach such a lurch leftwards. But then again if the electorate and politics in the UK (and elsewhere) hadn't changed then it probably wouldn't be in the mess it's in in the first place. You shouldn't rule it out… and definitely not if you're a responsible investor.