Investors Ask What Labour's Showing Means for British Investments

By Mike Bird Features Dow Jones Newswires

After the U.K.'s surprise election result, investors are asking a question they haven't in many decades: what will a self-described socialist mean for their British investments?

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Investors had expected a decisive Conservative victory on Thursday, but Jeremy Corbyn's Labour Party increased its share of the vote and pushed the Tories into a minority government.

That left investors scouring Mr. Corbyn's policies on business and the economy, widely considered the most left-wing platform from a major British party since the early 1980s.

"Investors must now start to contemplate the effect on individual companies of higher taxation and significant political interventions, including nationalization," said David Docherty, U.K. equity fund manager at Schroders, on the morning after the vote.

Mr. Corbyn is very unlikely to form a government, given the Conservatives have said they would work with an allied political party to get the majority of votes needed to push through their policies.

But that gives the Tories only a wafer-thin majority susceptible to rebellion within both parties. So Britain could be back to the polls in relatively little time. Likewise, if the Conservatives fail to get enough votes, it may have to turn to Labour, not least for the country's divorce from the European Union.

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Labour's flagship economic policies included increased taxes on corporations and the top 5% of earners, as well as increasing the minimum wage to an hourly GBP10 (about $12.74) from its current GBP6.70.

The party has promised to nationalize utilities, rail companies and the Royal Mail postal system. It also said it would launch a consultation on breaking up the banks and has pledged to take a "new approach" to the publicly owned Royal Bank of Scotland.

The U.K's FTSE 100 has hit record highs this year, but investors have differentiated between those stocks exposed to Britain and those whose revenues come mainly from abroad.

The FTSE 100, which makes more than two-thirds of its revenue outside of the U.K., is up 18.6% since last year's EU referendum. Meanwhile, the FTSE Local UK, which includes only stocks which make 30% or less of their revenue abroad, is up by just 0.7%.

"A number of stocks that could be vulnerable under a more interventionist government have been weak for some time," said Richard Colwell, head of U.K. equities at Columbia Threadneedle Investments, naming transport and utility stocks.

The prospect of state intervention in companies is unlikely to endear many British stocks to international investors.

"The U.K. market has been out of favor with international investors for some time," Mr. Colwell added. Asset allocation to U.K. equities is as low now as it was in 2008 at the height of the banking crisis, he said.

Not all of Mr. Corbyn's positions are viewed negatively by investors.

Indeed, many investors believe Mr. Corbyn's increased standing could in the long run help British markets, in particular the pound.

Though the Labour Party says that it believes Brexit should go ahead, it is expected to push for a so-called soft Brexit and argue for less restraints in immigration, both of which many investors would welcome.

Many analysts expected the sterling to rise if Mr. Corbyn was able to establish a minority government or exert influence on national policy.

To be sure, many analysts believe it is too early to begin pricing in any potential effects of Mr. Corbyn.

Market action on Friday suggests that most investors agree. J.P. Morgan named six utility companies likely to be negatively impacted by Mr. Corbyn's nationalization policies, including National Grid and Centrica, but two closed up on the day and none of the others fell by more than 1%.

"What we're seeing is a pretty modest response--if you didn't know there was an election this morning and just saw the share prices, you probably wouldn't infer it," said Matthew Jennings, investment director for U.K. equities at Fidelity International.

"There are many more important things to think about when you buy these companies than politics," he added.

Larry Hatheway, portfolio manager at GAM Holdings said it was too early for Mr. Corbyn to be impacting share prices. The U.K. election, as whole, left investors pondering a host of variables and potential outcomes.

"We watch these things, but I think right now the market sees it as political rhetoric rather than economic reality," Mr. Hatheway said. "If it does become reality then markets will react."

Write to Mike Bird at Mike.Bird@wsj.com

(END) Dow Jones Newswires

June 11, 2017 05:44 ET (09:44 GMT)