'A Labour Government Is Unambiguously Bad For Markets': Experts Warn Of Corbyn-danger Heading Into 2018

In a note to investors last year, Morgan Stanley said it was increasingly likely another General Election could be held next year after Prime Minister Theresa May only managed to form a minority government in 2017's snap election.

Meanwhile, Michel Perera, CIO at Canaccord Genuity Wealth Management, said the Labour Party appeared "stronger than it ever has under Corbyn" particularly compared to the Conservative Party where rifts have formed during the ongoing Brexit negotiaitons.

The CIO said: "[Corbyn] has engineered the support of the disenfranchised youth and won back defectors to UKIP, so seeing "Jezzer" in Number 10 is not beyond the realms of possibility."

Corbyn: Yes, we are a threat to the financial sector

It is thought Corbyn is set to take advantage from these "rifts" through a number of policies, which in the 2017 election included decreasing the higher tax threshold from £150,000 to £85,000, re-nationalising Royal Mail, railways and utilities, and an increase in infrastructure spend.

Ben Seager-Scott, chief investment strategist at Tilney Group (pictured), who recently carried out various scenario analysis of a Corbyn government, commented on last year's policies: "As one might have expected, the manifesto was heavily redistributive, with increased taxes on corporations and the wealthy coupled with improved pay for lower-paid workers and fresh infrastructure spending."

Asset class impact

Seager-Scott continued corporate earnings would be impacted "almost immediately" as a result of Corbyn's plan to increase headline corporation tax to 26% from 19% while minimum wage increases would lead to profit margins being squeezed, especially for firms with a large work force.

Therefore, he said UK equities and UK government bonds would be the asset classes most affected by a Labour victory, while gold and overseas assets would benefit from this result.

He said: "Were he to take power, the impact on sterling assets would be decidedly negative, with UK equities, gilts and sterling all likely to fall short term as markets price in policies designed to rebalance the share of economic gains from capital back to labour.

"The triple negative of increased taxation, wages and borrowing costs would likely have a fairly immediate impact on UK equities from an earnings outlook perspective and could trigger a de-rating of valuations."

Market underestimating

Furthermore, Tom Becket, CIO at Psigma Investment Management, said UK financial markets were underestimating a potential change in government.

"Whether the Prime Minister can survive any further calamities is highly questionable," he said.

"Within our own minds we are factoring that in with our views on UK domestic assets and the pound."

Although a Labour outright win is not the base case for Tilney, Seager-Scott said it was crucial to remain globally diversified across a range of asset classes while also holding positions in physical gold.

This was to ensure that portfolios perform well when there are broad movements in asset prices while blunting the risk of a black swan event, he said.

"Corbyn, has gone from being considered an unelectable "loony-lefty" to being the bookies favourite [at 3/1] to be the next Prime Minister," Seager-Scott said. "However, the likelihood of Corbyn leading the country…in reality still remains very unlikely.

"Despite the terrible result over the summer - or perhaps because of it - there is a strong incentive for the Conservatives to prevent a collapse of their own government that could come with a messy leadership challenge.

"A Labour government is unambiguously bad for capital markets," he continued. "We view this scenario as high impact, low probability."