Franklin Templeton manager Colin Morton says he fears the impact of a Labour government on UK equities, arguing it would require a significantly different approach to portfolios than the Conservatives fumbling through Brexit.
The Franklin UK Equity Income manager says he is concerned about Jeremy Corbyn’s pledge to raise corporation tax to 28 per cent, from its current 19 per cent, and his high-cost plans to renationalise industries and reduce student debt.
“The picture I’m painting here is that the pound gets hit very hard,” says Morton.
In that case, Morton says companies like Diageo and oil majors would do well as the corporation tax would hit only a small percentage of their revenues, while they would get the weak currency benefit.
In contrast, a domestic UK leisure company or retailer would see their entire corporation tax bill jump nine percentage points and they would take a further hit on import prices, which have already been a problem following sterling’s devaluation after Brexit.
“But the other alternative is that the Conservatives continue to limp on for the next number of years, the Brexit negotiations go much better than people expect, and as a result the pound strength continues to rally.
“Then all of sudden the outcome is much better for UK domestic stocks. You have got these two quite diametric views over the next two years that could play out.”
Franklin UK Equity Income fund performance
UK Equity Income
FTSE All Share
|IA UK Equity Income||-0.2||12.7||25.3||66.1|
Morton has already had to reduce his allocation to utilities, in which the fund now has a 6.1 per cent allocation, due to UK politics.
In the aftermath of the summer’s snap general election, the Conservatives announced a price cap on energy bills to fend off a resurgent Labour. The FTSE 350 Utilities index has fallen 17.4 per cent in the last six months.
“Utility stocks look really interesting from a valuation perspective at the moment, particularly water; however, you’ve obviously got politics completely taking over this at the moment,” Morton says.
“It’s not about common sense anymore, this is being used as a political football.”
Morgan Stanley said in a research note this week that postal services, telecommunications, financials and defence would also be vulnerable under a Corbyn-led government. It reckons a UK general election in the second half of 2018 is likely.
On Brexit, Morton says he is “almost” ignoring it.
“There’s lots of things that may or may not happen,” Morton says. “What I’m really banking on more is the companies I invest in being capable of being able to adapt and change to whatever is thrown at them by not being a part of the single market within the European Union.”
He says those companies include Unilever and Relx, which each represent approximately 3 per cent of the portfolio.
Morton is counting on the UK and EU27 governments realising it is important for companies to be able to trade with each other. “I’m hoping common sense prevails.”