The heightened potential of a Jeremy Corbyn-led government following the snap general election has added to fund managers’ caution on the UK when it is already vulnerable to Brexit risks.
In June, Theresa May’s election gamble backfired as results delivered a hung parliament resulting in the Conservatives establishing a slim majority through a confidence and supply agreement with Northern Ireland’s DUP.
Net outflows from UK equity funds totalled £1.1bn in election month, according to Investment Association figures.
Pictet multi-asset investment manager Shaniel Ramjee says: “I don’t think Brexit is going to be the thing that keeps corporates away. It could be a different government and uncertainty about things like corporate taxation.”
Labour’s election manifesto pledged to increase corporation tax for large companies, crackdown on tax avoidance, establish a £250bn infrastructure fund, and return rail, some utilities and the Royal Mail to public ownership.
A YouGov poll from earlier this month showed Labour attracting 44 per cent support compared to the Conservatives’ 41 per cent.
Ramjee adds: “While we’re in the EU and going through this transitional phase we’re just super competitive. What people are thinking less about is any change in government, which is going to become much more important.”
Pan-European fund manager for GAM Niall Gallagher says he is also worried about a Corbyn government, although he thinks the UK must address the intergenerational unfairness that Labour tapped into during its election campaign.
“Housing in the UK is an acute policy failure and has been a failure for the last 25 years. Corbyn’s hitting on things that are real, but unfortunately he hasn’t got the answers. I think he’s got the wrong answers.
“I think a Corbyn-led Labour government could be quite damaging to the UK at a point in time when the UK is going to be quite vulnerable anyway post Brexit.”
The political risks facing the UK show the importance of creating a diversified portfolio, says Axa IM bond manager Lionel Pernias.
He says some investors positioned defensively for Brexit could have been caught out if Labour won the election.
“You would be underweight cyclicals thinking that some spreads would widen. But if Corbyn had won the election investors would be at risk of being invested in some defensive companies, like the rolling stock, some utilities, because of the risk of nationalisation.”
Brexit remains the focus for now
Andrew Cole, who co-manages the Pictet Multi Asset portfolio with Ramjee and Percival Stanion, says the possibility of a Labour-led government will weigh on investors as the UK nears the end of its two-year Brexit negotiations.
“The market will then start to think whether there is an election associated with that event to rubber stamp what the decision is,” Cole says.
“My guess is at that point sterling will be a bit weaker. There will be some concern about gilts, there will be some concerns about things like property or anything labour intensive where you think there might be a change in terms of employment regulation or pay.”
Gallagher expects the issues that resonate with Corbyn voters will be left unaddressed by the current government, which will be doing “nothing but Brexit” during its current term.
“It’ll absorb entire energies of the political class, the civil service. It’s going to be just everything for the next five years or so. You’ve got 43 years of EU integration you’ve got to bring into the UK and replace all the institutions the UK relies on,” says Gallagher.
The GAM Star European Equity fund has a 16.4 per cent allocation to the UK compared to 27.8 per cent in the MSCI Europe index.
“Over the last five or six years the eurozone has been very bumpy and the UK has been relatively stable within Europe. Now it’s reversed; the eurozone has got its house in order, while the UK has a turbulent few years ahead of it,” says Gallagher.