The European Parliamentary elections and PM Theresa May’s resignation have opened up a path to power for a Labour government led by Jeremy Corbyn, and he’s not exactly investor-friendly, says John Stepek.
Britain hasn’t had anything that could be described as a hard-left government since 1979, when Margaret Thatcher ousted Jim Callaghan’s Labour government. That could be about to change. We can’t say exactly how likely a Jeremy Corbyn-led government is. But in the wake of the European elections and Theresa May’s resignation as prime minister, it’s certainly a possibility. The Conservative party is torn between “hard” Brexiteers such as Boris Johnson and near-Remainers such as Rory Stewart, yet both factions would agree on one thing – given their drubbing in the European elections, it would be best to delay a general election for as long as possible (5 May 2022 is currently the next scheduled date).
But the parliamentary arithmetic remains against the new leader. As Samuel Tombs of Pantheon Macroeconomics points out, “the Conservative party has already lost four MPs this year. It would take only a further three to defect and actively vote against the government or six to abstain in a confidence vote to bring it down”. So any attempt to drive through a “no-deal” Brexit, while not 100% doomed to fail, seems a very long shot – bear in mind that Labour can call a vote of no confidence at any time.
Meanwhile, Labour is now tepidly backing a second referendum, in response to its own losses to the Lib Dems and Greens. If the party can overcome internal squabbles (not to mention a formal investigation into institutional anti-semitism), then it’s quite possible that with the help of dedicated “Remain” MPs, Labour could topple any Conservative government led by a would-be “hard” Brexiteer and then trigger a general election. In short, a Corbyn government is hardly a sure thing, but you’d be unwise not to consider it as a potential outcome. So what are Labour’s plans? And how would it affect your wealth? Here’s our step-by-step guide to preparing your finances as best you can.
Nationalisation: sell utilities – buy green energy
Labour plans to take the railways, utilities and postal service back into public hands, with the current owners being compensated with government bonds. That’s concerning enough for investors in the private companies currently running those services.
What’s more worrying still is that Labour has used the example of the financial-crisis era nationalisation of Northern Rock – a bank that was insolvent and would have been worth nothing in the open market – to argue that Parliament can set the price at which any company is taken over by the state. Moreover, Labour’s basic argument for renationalisation is that private owners have milked these companies for profits, and thus deserve no sympathy if they lose some of that money when nationalisation takes place.
As the Financial Times points out, the most obvious reference measures for nationalisation could mean big losses for investors in utility companies. For example, notes the FT, water company Severn Trent has a market cap of around £4.6bn. If it were to be nationalised at its book value, the government would pay less than £1bn. Another option – valuing the firm based on its regulated capital value (a measure used by the regulator) – is less scary, but at £4bn it’s still a 13% discount for the government and a big loss for owners. And this is typical for the sector.
Infrastructure fund HICL makes the point that Labour’s nationalisation plans could hit 8.7 million pensions invested in the sector, the majority of which (59%) are held by public-sector workers.
It also notes that infrastructure requires investment, which requires investors, which is not likely to happen if said investors are concerned about the arbitrary confiscation of assets. Legal challenges to any nationalisation that seems more like outright confiscation are likely, of course, but there’s no guarantee of such challenges succeeding. In short, as Russ Mould of AJ Bell tells The Times: “The only thing you can really do if you are seriously worried about the nationalisation threat is to take pre-emptive action and hit the sell button”. Mould also notes that outsourcing companies are very close to the firing line too – although admittedly, we’ve never been keen on that sector in MoneyWeek in any case.
So what should you consider buying in place of your utility stocks?
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