So, the European elections have been and gone and the government has been absolutely hammered for its inability to make progress on Brexit.
I have no better idea than you as to what’s going to happen next, be it a no-deal Brexit, some kind of revised deal, a second referendum and/or another general election.
Nevertheless, I do think that the once-laughed-at scenario of a Labour government getting back into power with Jeremy Corbyn at the helm is certainly more plausible than it used to be.
In Labour’s sights
Very generally speaking, a new Labour government might not be great news for those who have wealth or are in the process of trying to build it. It’s particularly problematic for those who invest in the stock market.
Back in 2017, the party made a pledge to nationalise rail companies, mail delivery, energy supply networks, and water businesses. You can expect a similar pledge if the country were asked to return to the polls later this year or next.
This clearly has implications for a few FTSE 100 stocks, including United Utilities and Severn Trent — the two largest listed water companies with market capitalisations of £5.3bn and £4.5bn respectively.
They’re also big favourites among income investors and understandably so.
Both stocks are forecast to yield 5.2% in 2019 based on their current share prices. That’s clearly far superior to the derisory rates of interest on offer from a typical Cash ISA, although it’s worth pointing out that cash returns from both (and particularly United) haven’t exactly rocketed over the years.
However, after years of being regarded as a ‘safe’ place to park your cash and generate substantial, reliable dividend streams in the process, these firms could now be at risk of returning to public ownership.
That said, there will be many out there who believe that a Jeremy Corbyn-led government, while not impossible to envisage, is still very unlikely to happen.
As Sir John Curtice — Professor of Politics at Strathclyde University — commented yesterday, those already in power “often perform badly in European elections, as voters take the opportunity to express their disappointment with its performance without the risk that their vote might put the opposition into government“. The fact that Labour didn’t do all that much better is also telling.
Nevertheless, with senior Conservative MPs likely to be at each others’ throats until they elect a new leader in July, I can’t see the party’s popularity increasing anytime soon.
Not worth the risk
Severn and United’s shares had identical valuations of 14 times forecast earnings before markets opened this morning.
That looks expensive, especially as they face an uncertain future (although I acknowledge this could be applied to the vast majority of UK-focused businesses right now).
Due to needing to keep their infrastructure running smoothly, both also have not-insignificant amounts of debt and are exposed to ongoing regulatory pressures.
Rather than attempt to predict the outcome of political events, I suggest those holding (and determined to continue doing so) should make checking they are sufficiently diversified elsewhere a priority.
It’s also worth bearing in mind that Shadow Chancellor John McDonnell has already stated that Labour would only pay a third of the water industry’s estimated market value to investors when it is nationalised.
Personally, I’ll continue to avoid both stocks for the foreseeable future.
