What’s worse – no-deal Brexit or a Corbyn government?

published 12 September 2019

By the time you read this sentence, the chances are the political situation in the UK will have undergone several new last-minute reversals, generating acres of newsprint and screen rants in the process. In this week's magazine we give a summary of the story so far, and Helen Thomas of Blonde Money tries to cut through the noise to the fundamental narrative. Yet if the last few weeks have made anything clear, it's that no one can be certain of anything.

Of course, any sensible long-term investor already knows that. You can't time the market. Instead, you have to focus on ensuring your portfolio (and your lifestyle generally) can withstand whatever the world is likely to throw at it. The goal is not to predict the future it's to be prepared for it when it comes. As Thomas argues, there's a good chance that the future for those of us based in Britain contains either a "no-deal" Brexit, or a Jeremy Corbyn government (or less likely perhaps, but still possible both). So what's likely to happen in each case?

"Why should democracy end when you walk into work? Why should the place where you spend most of your day sometimes feel like a dictatorship?" That was Labour leader Jeremy Corbyn speaking to the Trades Union Congress earlier this week about his plans to reverse the "deliberate, decades-long transfer of power from working people", with the creation of a new government "Worker Protection Agency" alongside the repeal of various bits of legislation restricting the power of unions to strike without the clear support of a majority of their members.

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Now, you may well agree with MoneyWeek that egregious executive pay needs to be tackled (it's an issue we've been banging on about for years now, as regular readers will know). You may also think that real wage growth has been inadequate, and that the share of the pie going to capital rather than to labour is unsustainable (we do). However, these are not the words of a man who believes that private enterprise has much of a positive role to play in the economy and the policies of any Labour government led by Corbyn would very much reflect this view.

In this light, Citigroup and Deutsche Bank, just two of the global investment banks who are trying to make peace with the idea of a Corbyn government seeing it as a better bet than a no-deal Brexit appear to be suffering a failure of imagination. No-deal Brexit might seem like an extreme outcome to multinationals who have grown used to working with a supranational organisation that is very good at protecting big companies from new competitors, but Corbyn and Labour's shadow chancellor, John McDonnell, have laid out a set of plans that are by any objective standard highly radical compared with the economic approach that Britain has grown used to over the past 35 years or so. As economist Julian Jessop puts it in The Daily Telegraph, "Labour is planning to tear up the rules of a liberal, free market economy".

That's not scaremongering. McDonnell himself says: "We have to rewrite the rules of our economy". Even under Labour's current plans (never mind anything they might propose if they come to power), property rights the foundation stone of any functioning free-market economy are under assault. There's the plan to renationalise industries from utilities to railways to postal services, without paying the market price for them. There's the plan to force companies to give 10% of their shares to staff. There's also the recent suggestion, raised by McDonnell in a Financial Times interview, that private tenants would be given a "right-to-buy" the implication being that tenants could force their landlords to sell their rented property to them at a government-determined price.

Even if you have sympathy for the politics behind all this, the practical problems are breathtaking and the unintended side-effects will almost certainly damage investment and economic growth within a very short space of time. If property of all kinds is up for grabs at the whim of the government, then no one will invest here. And this is before we consider issues such as the impact of a financial transactions tax on investing and the City, for example, or the risk of capital controls being imposed to prevent capital flight.

So a Corbyn-led Labour government would be bad news for investors and it is hard to think of an obvious upside. As the FT puts it, "at the heart of everything is one word: redistribution". As a minimum, on a personal finance level, you would have to expect new and higher taxes, while more government intervention in the economy is likely to hit corporate profitability (and thus share prices), particularly of domestic companies less able to make money offshore.

So what of a no-deal Brexit? Deutsche's Oliver Harvey reckons that a Corbyn government might be less bad than no deal because it would be temporary, whereas Brexit is permanent. We're not sure we'd agree with that. Remember that "no deal", by definition, has to be temporary it's just a step on the road to "some sort of deal". Indeed, even if we'd left (or do leave) under Theresa May's Withdrawal Agreement, we'd still have to discuss trade terms. A Corbyn government even a short-lived one which managed to push through confiscatory policies such as renationalisation would surely damage investors' confidence in the UK permanently (or at least for a very long time indeed).

As for the consequences of no deal, there's no denying that in the short term we might see disruption. However, it is interesting that even a think tank like The UK in a Changing Europe, which is by no means pro-Brexit (it believes "no deal" will lead to "prolonged and severe political and economic uncertainty") pointed out earlier this month that "disruption on day one may not be as immediate and visible as earlier reports have predicted. Business, and government, have put in place contingency plans to mitigate the worst effects". While the most obvious immediate impact would be on trade, some of this would be "minimised by stockpiling, business anticipation and a public holiday in the EU 27". By the start of November, even the damage to the pound "may already have been priced in' The financial system overall will remain stable".

Similarly, the Bank of England downgraded its (still hugely gloomy) forecast for no deal, due to preparations made so far. Bank governor Mark Carney told MPs last week that "real progress" had been made. Ironically, Citigroup's European chief executive David Livingstone tells The Daily Telegraph's Ben Wright that "we are already operating on a post-Brexit' basis" and that "the City will still be hugely important... the UK will have less access to Europe, but it still has good access to the rest of the world, and crucially, to capital".

The long-term effects remain to be seen. We will almost certainly be negotiating some of the more detailed points for years to come, and the next recession regardless of when it arrives will almost certainly be blamed on Brexit whatever happens. But in all, it's a far cry from planes being grounded (they won't be), or unmoored derivatives contracts blowing up the financial system (that's been tackled because it would have been a disaster for all involved). In short, we suspect that no-deal Brexit would result in less uncertainty, after the initial shock, whereas a Corbyn government could lead to a lot more. See below for more on what investors might do to mitigate all this.

However, as we point out on page 14, UK equities look cheap. As a result, in the event of a no-deal Brexit we wouldn't be overly concerned current valuations represent a decent buffer against nasty surprises. We have to admit that a Corbyn government is a tougher call, and one that probably involves being a lot pickier about what you invest in. Is a Corbyn government likely to inflict much damage on the resources sector? Probably not the mines are mostly overseas and industrial companies are largely viewed benignly. But are utilities currently paying a sufficient reward, given the risks of nationalisation? It's also hard to see the high-street banks escaping unscathed, although the question there is more nuanced (bans on bonuses might also drive lower wage bills, by no means bad news for shareholders).

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.