As Britain gets ready to vote on 12 December, initial polls point to a hung parliament. But the final result may be a complete surprise for most of us. Every UK election since 1922 has been won by either the Conservative or party. Therefore, even in case of a hung parliament, it is likely that one of these two parties will have the most number of seats in Parliament and try to form the next government.
Investors in general do not like uncertainty, and a new Prime Minister with new ideas could mean a somewhat different economic and fiscal environment for the country. Given the potential ambiguous election result, I want to discuss what investors may expect to see if we were to have a new government led by Jeremy Corbyn.
Labour leads the renationalisation discourse
Although Brexit is possibly still the most important topic of discussion prior to the election, a major debate is also happening between nationalisation advocates and sceptics.
If Corbyn becomes the new PM, then the current renationalisation discourse led by Labour is bound to intensify.
Companies in several industries may eventually be affected. Investors are already beginning to wonder about the fate of utilities such as National Grid, or water companies United Utilities and Severn Trent, as well as Royal Mail.
It is hard to know how such a gigantic task of renationalisation would work in practice or what the final cost-benefit analysis would look like.
However, I do not foresee any Labour government being too unfair with potential purchase prices. Furthermore, current stock prices of these companies may already be reflecting a possible change of ownership.
How about buy-to-let investors
Shadow Chancellor John McDonnell recently proposed a ‘Right to Buy’ scheme for the private rental sector. Even though the details are thin, a long-term private tenant may be given the right to buy his or her home from the landlord at a discount.
It is almost impossible to know the potential effect of such a policy on house prices, rents, or even shares in the FTSE.
But buy-to-let investors have already been feeling the squeeze with a 3% stamp duty surcharge on property purchases.
Therefore, if you are an investor who is looking to put your hard-earned cash into an instrument other than private property, the stock market offers several alternatives.
Why I’d diversify now
For prudent investors who do due diligence, election uncertainty can also provide opportunities for finding discounted shares before stock markets regain their confidence and footing. Personally I’d use the next few weeks to review my portfolio and make sure that I’m comfortable with my level of diversification.
If you’d like to have domestic exposure, but are rather worried about selecting individual companies due to increased uncertainty an industry may face, then you could buy into a FTSE 100 tracker fund.
It is also important to remember that many of the giants of the FTSE 100 are multinational companies that generate an important percentage of their earnings from overseas. In other words, the FTSE 100 index is not exactly the UK’s economic bellwether.
On the other hand the FTSE 250 index is made up of firms whose sales are focused more on our domestic market. As a result, this index may be more volatile after the election result is announced.
