Windfall taxes imposed overnight. A sweeping programme of nationalisation. A levy on every bank transaction. A campaign on ‘back taxes’ that amounted to little more than hustling money out of corporations. The first couple of years of a government run by Jeremy Corbyn might not be quite as extreme as the all-out assault on private enterprise launched by his hero Hugo Chavez in Venezuela, which included all of those measures. But it would still be most left-wing government seen in this country since 1945, and quite possibly ever.
If it happens — and there are still almost five years before there has to be another election — what kind of steps can investors take to protect their wealth? The most obvious is to move as much money abroad as fast as possible. But there are other steps they can take as well. A few industries will do well from the massive splurge of spending to which the Labour Party has committed itself. And for anyone with an appetitive for risk, some of their nationalisation targets might well be worth a flutter, for the simple reason that governments often overpay for anything they buy. Corbyn-omics will damage the economy, of that there can be no question. But it does not have to damage your portfolio.
The general election in June was meant to bury the Labour Party for a generation at least. As we all know, it did not go according to the script. A wounded Conservative Party is clinging onto office, while Corbyn has secured complete control over his movement and turned into a surprisingly effective campaigner. No one should assume that a Labour victory is inevitable: in the late 1980s Neil Kinnock often had towering leads over Mrs Thatcher only to see them evaporate on polling day. But a far-left administration is far more likely than it has been for two generations.
We can already see how nervous that makes investors. Whenever Theresa May’s administration wobbles, the pound sinks and the FTSE trembles. Corbyn and his Shadow Chancellor John McDonnell have promised a radical programme of nationalisation, strict curbs on executive pay, state-sponsored investment, big increases in public spending and higher pay for government workers. All a dramatic shift from four decades of Thatcherism, New Labour and the current version of Conservatism, all of which, whatever they differed on, supported a thriving private sector. Corbyn would lead a government that tolerated business at best, and in many instances would be actively hostile to it. No wonder investors don’t like the sound of it: they will be its main target.
And yet it’s important to remember that stock markets can do quite well even under radical Labour administrations. Under the 1974 to 1979 government, the FTSE All Share Index rose 87 per cent (although that doesn’t look so good once you take account of inflation). Under Harold Wilson’s 1960s government it rose 13 per cent, and under Clem Attlee by 16 per cent. Attlee embarked on extensive nationalisation as well, and so did 1970s Labour: large parts of the aerospace and ship-building industries were taken into state ownership, and a majority stake in the car industry through the ill-fated British Leyland. The economy ended up in ruins and had to be bailed out by the IMF. But the stock market didn’t collapse just because a few industries were nationalised, and there is no necessary reason why it should do so next time round. So how should investors protect themselves from a Corbyn government? Here are three places to start.
First, and most obviously, get out of the pound. John McDonnell has already admitted he and his team have been ‘war-gaming’ a run on sterling. That makes sense. Even mildly left-leaning Labour administrations end up having trouble on the foreign exchanges: both the 1960s and 1970s governments saw sharp devaluations. Just the rhetoric of the Corbyn team will be enough to send global investors fleeing for the exit. Add in the fact that the UK runs one of the largest trade deficits ever seen in the developed world, at more than 6 per cent of GDP, and a dramatic collapse of the currency seems just about inevitable. If the pound falls — perhaps close to parity with the dollar, and probably below parity against the euro — then any holdings you have abroad in cash, shares or real estate will automatically rise in value. On top of that, none of Corbyn’s and McDonnell’s wealth-destroying policies will have any impact on other countries. If you don’t already hold the majority of your portfolio in American, Asian, or continental European equities, then you should fix that while there’s still time.
But as in the 1970s, there is no reason why some sectors of the British stock-market should not do well. So secondly, get into assets that are likely to nationalised. That might sound crazy: won’t you simply lose everything when the government appropriates your shares? Well, not necessarily. McDonnell has said that he wants to bring the rail, water and energy companies back into state ownership, with the Royal Mail not far behind. But the Party has also said that it will pay compensation, even if there have been noises about values being set by Parliament rather than the market. In the past, Labour has been reasonably generous when taking control of industries: when the shipyards were nationalised it paid market price, with an arbitration panel if shareholders felt they were being treated unfairly.
It’s a risky bet, but for all the bluster the government will probably end up over-paying. As the election approaches and if Labour looks like winning, the shares of companies such as Royal Mail and Pennon Group, which owns South West Water, will probably fall sharply. Buy into them against the tide, and once the terms of the nationalisation are revealed you might well realise a profit.
Finally, buy into the regions and infrastructure contractors. Why? Because they will benefit from a massive splurge of spending. Areas such as Wales and the North-East that rely heavily on public spending should do better. So will Scotland, since Labour seems unlikely to win alone and presumably the SNP will extract a high price for propping up the government. Funds that invest in major projects – such as 3i Infrastructure – may well profit from all that extra cash. Look as well at industries that will do well from specific policies. Abolishing student loans, for example, will mean there will be more people at university, and they will have more money to spend. The booming industry in student flats — take a look at companies such as Empiric Student Property — should do well.
None of those are investments to make right away. Unless you think the government may collapse at any moment, an election is not likely until at least 2021. But in the years running up to that, smart investors should start shuffling their assets for a change of government. Overall, the UK economy will suffer from five years of Corbyn. Traditional big state socialism has been tried in lots of countries, including this one, and every time it has ended in economic disaster. There is no reason to think Corbyn and his team have found some secret formula for making a success of it. Eventually the money will run out — but it will take a few years to reach that point. In the meantime, so long as you have plenty of cash parked elsewhere, and choose the right sectors, there’s no reason why your own assets should suffer.