Fund managers have criticised Labour party leader Ed Miliband’s plans to break up the UK’s largest banks and accelerate the introduction of bonus caps.
In a recent speech, Miliband announced a package of proposals to bring “reckoning” to the banking system and bring forward a cap on bankers’ bonuses.
He also outlined plans to break up Britain’s biggest banks and free up their market share of the high street, opening the possibility of introducing two new challenger banks.
Since Miliband’s comments on 17 January, the share prices of Lloyds, Barclays and Royal Bank of Scotland have all declined as investors factored in an increase in political risk into their views.
Premier fund manager Chris White sees Miliband’s comments as indicative of imminent political risk and prefers to play banks through non-UK names, such as HSBC.
White, who manages the £361m Premier Income fund, says: “Political risk has entered the sector and it is likely to stay. We are within 16 months of a general election – that is well within the timeframe of most investors.
“There is a cloud of uncertainty as a result of recent statements by Ed Miliband.”
Old Mutual Global Investors financials analyst Rob James, who works on Richard Buxton’s £1bn Old Mutual UK Alpha fund, says: “Whichever way you cut it, it is a very unhelpful statement. We are effectively being told the government knows best.
“I am not sure this sits comfortably with the public. Having big brother tell you what is best is offensive.”
White views UK names as good investment opportunities but sees valuations being inhibited by such political risk and uncertainty in the run-up to a general election.
The manager says: “I suspect political risk will put a cap on any real excitement in domestic UK names. Lloyds would be an interesting opportunity were it not for political risk. Labour’s political threat is real and things can move quite quickly in politics.”
“And I am not sure our market looks substantially different to other European markets in terms of market share.”
James also questions Miliband’s perceptions of UK market share and specifically the plans to introduce two challenge banks.
“The banks that typically failed were all held up as being challenger banks. Creation of challenger banks means it more competitive but does not make it more stable,” he says.
“An unstable banking system is the worst thing you can have for an economy.”
Schroders fund manager Nick Kirrage has had exposure to banks for a long time and still regards them as a viable investment but is aware of the risks of people focusing more on political sentiment than reality.
Kirrage, who manages the £1.5bn Schroder Income fund, says: “We have always liked banks and have felt they have always been fundamental for the economy. As long as they are sensible, they can make a return for shareholders.
“People focus on Ed Miliband opening his mouth and less on the business fundamentals. Is it a bad thing if he split them up? It sounds onerous.
“Going after banks is a political vote winner and there has always been drastic headlines around banks. Vince Cable talked a lot about this but has not done a lot since.”