About That Other Supposed Political Risk for UK Stocks

Editors’ Note: We favor no political party or politician in any country and assess political developments solely for their potential market or economic impact.

For those following all the twists and turns in UK politics over the past week, Tuesday offered welcome respite: Parliament was closed—and will be for five weeks. No more live-blogging of votes. No more midnight debates. No more Members of Parliament (MPs) shouting over each other or holding up protest signs for the cameras. No more constant checking to see if Jacob Rees-Mogg is sitting up straight. No more waking up every morning to see if anything radical happened overnight. For the next five weeks, we have stasis. But that doesn’t mean investors won’t have political chatter to filter through. Pundits will surely slice and dice Prime Minister (PM) Boris Johnson’s ongoing Brexit negotiations. Plus, while the opposition parties shot down a general election for the second time last night, that was solely due to their preference to delay the contest until late November.^[i] Because an election is a foregone conclusion, pundits are already churning out commentary alleging a victory by Labour leader Jeremy Corbyn—an avowed leftist—will be toxic for UK stocks. Don’t be so sure. Stocks care about policies, not personalities, and the likelihood a Corbyn administration could accomplish all the things people fear looks exceedingly low.

Corbyn’s policy wish-list does look like a socialist’s dream. It includes nationalizing major swaths of the UK economy, naming and shaming high earners, banning companies from awarding large bonuses and undertaking a massive redistribution of income. We think it is fair to presume stocks might frown on some of these, as they would interfere with the free market and corporate profits. However, what matters most is whether any of this stuff could actually happen. If investors fear the worst and a Corbyn administration doesn’t accomplish much, then that raises the risk of positive surprise—much like when a new US president elected on anti-market campaign pledges doesn’t do as much as feared.

If you buy political pundits’ analysis, then Labour’s chances of gaining seats in the next election improve the longer it is delayed. While polls aren’t reliably predictive, the latest ones strongly favor Johnson’s Conservatives, and pollsters estimate their 10-point lead could translate to a 50-seat (or so) majority. But if the legislation forcing a Brexit delay kicks in and Johnson has to face voters after saying he would “rather be dead in a ditch” than delay Brexit, many speculate things could go badly for the Conservatives unless they forge an alliance with Nigel Farage’s Brexit Party to avoid splitting the vote. That could give Labour an opening to either win a small majority or form a coalition or minority government in a hung Parliament.

This is where things start to fall apart for Corbyn’s agenda. If he becomes PM, it seems likely Brexit won’t have happened. He and other senior Labour MPs have said the party’s official position will be to renegotiate the Brexit deal and then put it to a referendum—basically a backdoor attempt at stopping Brexit, if you take Shadow Foreign Secretary Emily Thornberry at her word. That means Brexit will hog the agenda, as it did throughout former PM Theresa May’s leadership and Johnson’s tenure so far. That wouldn’t leave much room to nationalize the railways or write a sweeping new tax code.

Even if these bills did make it to the House of Commons, passage isn’t guaranteed. It isn’t exactly a secret that most Labour MPs disagree with Corbyn’s agenda. Many entered politics under the tutelage of former PMs Tony Blair and Gordon Brown and are much more centrist as a result. We suspect backbench revolts over radical policies would make the Conservatives’ various Brexit-related revolts look like a picnic.

If Labour doesn’t win a majority, the chances of radical legislation diminish even further. As we write, a coalition with the Liberal Democrats looks all but impossible, as they announced last night their manifesto will include a pledge to cancel Brexit. That is counter to Labour’s position, making the formation of a government impossible unless either party commits a massive U-turn. Should that happen, it is tough to envision the centrist Lib-Dems being ok with a leftist agenda, especially since some of them are former Conservatives. Partnering instead with the left-leaning Scottish National Party (SNP) might be a more ideologically consistent marriage, but the SNP’s desire for a second Scottish independence referendum adds a wrinkle. 

Should Corbyn become PM, we suspect his administration would look a lot like Johnson’s or May’s—lots of talk but little or no action. In that case, with fear of a socialist Britain baked into UK stock prices, reality would likely be a positive surprise—potentially one nicely bullish factor.

This isn’t a forecast! We don’t know who will win the election or by how much. Brexit uncertainty may still linger, if the government asks for and gets a delay beyond Halloween. But it illustrates the risks of letting political hopes and fears drive your investment decision-making. Corbyn isn’t automatically bearish any more than a 50-seat Conservative majority is bullish. It all comes down, always, to what investors’ expectations are, which policies pass and how reality squares with sentiment. No political party has a monopoly on beneficial or subpar economic policy.

For now, just be patient. Don’t sweat political polls, campaign manifestos or whatever mumbo jumbo politicians spout at the upcoming party conferences. Don’t get hung up on articles claiming to tell you what Corbyn or Johnson will mean for UK stocks, interest rates, GDP, wages or employment. Just wait for the results, see how much gridlock emerges, and go from there.