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?
You could go for global utilities instead (although bear in mind that political risk isn’t only rising in the UK), via a fund such as EcoFin Global Utilities & Infrastructure Trust (LSE: EGL), which trades on a discount of around 10% and yields around 4.5%. Its top holding is US-listed NextEra Energy, a Florida utility and one of the largest renewable energy companies in the world, notes Motley Fool. On that point, one sector that Labour hopes to supercharge as part of its nationalisation plans is the renewables business. To achieve that (which no doubt will be tougher than it looks), it will need battery storage. That’s where a relatively new investment trust, Gresham House Energy Storage (LSE: GRID) comes in. The fund looks to invest in and generate income from large-scale energy storage systems located around the UK. And last week David Stevenson suggested looking at SDCL Energy Efficiency Income (LSE: SEIT), which helps to fund energy efficiency projects.
Tax and savings: use your allowances while you can
Unlike former chancellor and prime minister Gordon Brown, shadow chancellor John McDonnell doesn’t believe in stealth taxes. He’s more than happy to talk about how much higher taxes are heading.
On income tax, the top rate will go back up to 50%, and be imposed on annual earnings above £123,000. The 45% rate, which currently kicks in at £150,000, will start at £80,000. Capital-gains tax (CGT) is likely to go back up to 18% (basic) from 10%, and to 28% (higher-rate taxpayers) from 20%, and while Labour hasn’t mentioned it for fear of alienating voters, the rules on inheritance tax could well change too. Then there’s the new financial transactions tax – a 0.2% charge on all financial transactions. Finally, a one-off wealth tax of 20% on assets above a certain threshold (high-value residential property is the most obvious target, as it’s hard to move offshore) has been floated in the past.
What does all of this mean? If you have some control over when you take your salary (for example, you run your own business), then consider bringing as much of that forward as you can. If you’re an employee, there’s not a lot you can do, but do be sure to use up as much of your pension (£40,000 a year for most taxpayers, plus any left over from the prior three years) and individual savings account (Isa – £20,000 a year for adults, and don’t forget your children’s Junior Isas) allowances as possible – these may well be cut should Labour come to power. The tax breaks on pensions almost certainly will (tax relief on higher-rate taxpayers has been a sitting duck for many years now, but it’s hard to imagine that a McDonnell chancellorship wouldn’t finally put an end to it).
It’s also worth reviewing your portfolio. If you have investments sitting outside an Isa or your pension, look at your potential capital-gains liability, remembering there is an annual allowance of £12,000 per person. If you can transfer assets to a partner on a lower tax bracket (which does not trigger a CGT charge), then it is well worth considering, as is sharing assets generally in order to maximise your allowances.
The economy: heading for inflation
Under Labour, public spending is likely to outstrip tax revenues. Whatever the manifesto argues, the problem with getting “the rich” to pay for everything is that they already pay a great deal (remember that the top 1% of income-tax payers generate more than a quarter of income-tax revenues, for example), and that even if they don’t just up and leave the UK (many can’t), there simply isn’t enough to fund all of Labour’s spending promises. That’s before you start to consider how a financial transaction tax might impact on activity in the financial sector, which is also a big tax payer (if there’s one way to make financial institutions act on those Brexit relocation plans they’ve been threatening to put together, a transaction tax is it). Meanwhile, rising taxes, more government intervention, and a general sense of hostility to wealth creation are not conducive to an entrepreneurial environment. As a result, tax forecasts are almost certainly over-optimistic, while spending plans rarely come in on budget – so we are likely to see a deterioration in the public finances, which were only just beginning to get back towards something approaching an even keel.
For now, the “bond vigilantes” in the markets don’t care about deficits, national debt, or inflation. They are rigidly focused on deflation and recession risk, and on finding what they regard as “safe-haven” assets to buy. So in the first instance, unless the tone taken by the new government was truly radical, then we suspect UK government bonds (gilts) would be slow to react, particularly if a new Labour government also looked likely to result in a very soft Brexit, or no Brexit at all. But in the longer run, higher spending should weaken the pound, boost inflation, and drive interest rates higher and government bond prices lower (ie, the cost of borrowing should rise). And if Labour did decide to turn to Modern Monetary Theory (MMT) to “solve” the problem – printing money to fund government spending directly, rather than borrowing it – then that could rapidly drive inflation an awful lot higher.
So a weaker pound and inflation are likely in the long run. And that’s something to bear in mind when looking at your portfolio. Be wary of domestic assets that can be easily targeted by a tax-hungry government – residential property is the most obvious such investment. It’s already proved a popular target for Conservative politicians, so it’s hard to imagine a Corbyn administration relaxing the rules on private landlords. If you’re relying on buy-to-let to pay your pension, act to diversify your portfolio now – you don’t necessarily have to sell off all your properties, but don’t have all your eggs in that basket.
That said, deciding on what to invest in instead is not straightforward. We have suggested investing in the UK in recent months due to Brexit-inspired caution among global fund managers and the ridiculously low level of the pound, and I wouldn’t necessarily reverse that – a Corbyn government is not a certainty and British assets are pricing in a fair bit of pain already. However, you should still have a significant chunk of your portfolio in global assets. Bear in mind that the UK accounts for only about 6% of total world stockmarket capitalisation, so even having 10% of your portfolio in UK stocks makes you “overweight” in global terms.
If you own individual stocks, you have to consider – what is the political risk here? Conduct an overview of your current portfolio and ask yourself how vulnerable each component is. Retailers aren’t at risk of being nationalised anytime soon, for example. But how would they cope with a much higher minimum wage, or rising property taxes? Higher corporation tax will hit domestic companies – who don’t have the luxury of shifting their tax base – harder than big multinationals. Then there’s the complexities of Labour’s plan to force large, listed companies to save 10% of their shares in employee trusts.
In terms of funds that could be useful in protecting against inflation and also give you global exposure to attractive markets, the Ruffer Total Return Fund owns a big chunk of index-linked gilts, a bit of gold, and plenty of US and Japanese equities. And if you’re looking for one particularly attractive foreign market, we still rather like Vietnam – which also appears to be one of the biggest beneficiaries so far of the trade war with China (see page 11). Two options are Vietnam Enterprise Investments (LSE: VEIL) and VinaCapital Vietnam Opportunity Fund (LSE: VOF).
Investing: fear of (capital) flying
What impact could a Corbyn-led government have on markets? As Edward Smith noted in FTAdviser last year, when Francois Mitterrand came to power in France in 1981, on a platform of nationalisation and wealth taxes, the French market slid by 35% relative to global equities within five weeks, while the franc was devalued several times amid capital outflows.
Of course, it’s hard to compare early 1980s France to late 2010s Britain, but capital flight is a concern of which Labour is aware. McDonnell spoke at the Labour party conference in 2017 of “war gaming-type scenario planning” to deal with a potential run on the pound if the party came to power.
Could capital controls (rules that restrict the volume of money that can leave – or enter – the country) return? It’s not beyond the realms of possibility. But regardless of such fears, be sure to avoid elaborate tax-planning ruses – we wouldn’t be surprised to see scam merchants pitching lots of these ideas via email and cold calls if a Corbyn government looms, but “tax avoidance” and “tax evasion” have rapidly become synonymous even under the Tories, so if it fails the sniff test, don’t go anywhere near it. If you are seriously concerned about capital controls, then physical gold is one easily portable asset to own for emergencies. Other options are to open an overseas broker or bank account – bear in mind that consumer-protection regimes will differ form our own.
The ultimate option, of course, is to leave the UK altogether. According to The Economist, for example, “well-heeled types… have been buying property on Guernsey… attracted by its flat 20% income-tax rate and lack of capital-gains or inheritance taxes”. Merryn has written about the easiest ways to get a second passport before (see moneyweek.com/passport), which might be worth looking into. But you don’t necessarily have to get a new passport to move abroad – appealing options in the sun include Portugal, which has an attractive approach to pension taxation, plus an established, popular “golden visa” regime; or Cyprus, which is also tax-efficient, and open to wealthy immigrants. So if you are in a position to make a move and are genuinely considering doing so, now is the time to start investigating your options in more detail.
Don’t be complacent – the world has changed
A final point – if you think this all sounds far-fetched or exaggerated, remember that this is only because we’re at the tail-end of an era in which politicians, regardless of party, rarely disagreed on the best way to run the economy. They would tweak taxes and benefits according to taste, but largely believed in free markets and globalisation, and as Peter Mandelson so memorably put it, were “intensely relaxed about people getting filthy rich as long as they [paid] their taxes”. For better or worse, this is not the world in which we live any more. This isn’t necessarily a bad thing – at MoneyWeek we often complain about over-generous executive pay, and a lack of accountability.
But where we’d favour simplification and increased transparency as a solution, instead the dead hand of government has been growing ever heavier. The post-2010 Tory party has steered far closer to “nanny knows best” than to the free-wheeling Thatcherite era. People still get rich, but no one is remotely relaxed about it. And under Corbyn, this would get worse. In the Corbyn-ista view, the economy is a zero-sum game. If one person has, another must lack. Therefore, personal wealth is always theft – if you are wealthier than average, it must be because you’ve exploited or stolen from someone else. Given that starting point, pretty much all private property becomes fair game. It’s just a matter of what you think you can get away with. So don’t delay – start preparing now.