We’re approaching the point where investment experts give their predictions for big themes in the year ahead. We will publish our analysis of the key issues facing investors in 2018 in a fortnight’s time (14 Dec).

Ahead of that article, it is worth touching on one issue which has the potential to be a much bigger concern for investors if Brexit negotiations don’t go smoothly.

That issue is the potential for Labour to get into power and what that would mean for a large number of companies on the UK stock market. Before we explain why, it is important to stress that Shares is an unbiased publication when it comes to political matters.

Why a ‘radical’ labour could be a game-changer

Morgan Stanley’s chief European equity strategist Graham Secker says if he was a UK fund manager, he’d be very concerned about a potential change in government in 2018. ‘It could be the biggest shake up in the domestic backdrop since the 1970s,’ he adds.

Secker’s point lies with how new governments over the past 30 years or more haven’t really pushed through any radical policy ideas – yet the situation could soon change, judging by Labour’s comments over the past year. ‘You need to think about areas such as corporate tax rates going up, nationalisation and favouring labour over capital,’ he says.

Three big issues to consider

Labour’s election manifesto in 2017 gave support to re-nationalising infrastructure-related assets such as utilities, postal services, telecoms and bus/rail. The Party wants to raise corporate taxes up to 26%. And spending priorities could shift in favour of low-income households and the public sector and away from outsourcing firms and defence companies.

Morgan Stanley believes there is more than a 50% chance of another UK general election in the second half of 2018. Secker says investors should already be aware of the Labour-related risk to parts of the UK stock market as many stocks have already had this risk discounted into their valuation. However, he doesn’t believe the risk is fully discounted yet.

Stocks at risk

Labour has talked about raising the minimum wage which could be bad news for businesses with low profit margins and large staff numbers such as some retailers.

In response, Morgan Stanley has analysed the UK market for companies with high domestic exposure and a combination of low margins and high number of employees and produced a list of 35 vulnerable stocks.

It says the likes of Ocado (OCDO), Sainsbury’s (SBRY), Serco (SRP) and Tesco (TSCO) are among those could be most negatively impacted by a Labour government, even after netting off the positive impact from easier fiscal policy that could boost overall economic growth. Royal Mail (RMG) and Go-Ahead (GOG) are among the stocks most at risk from the nationalisation threat.

What happens if Brexit talks go well and there is renewed confidence in May as prime minister? Secker says that while it is feasible for
the aforementioned ‘at risk from Labour’ stocks to bounce back, he says this may only be a short term trade.

‘Without there being more of a shift in opinion polls from Labour to Conservative, how much are you really going to chase these stocks?’ he concludes. We’ll be watching this situation closely. (DC)

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