MPs may have shot down attempts to call a General Election before 31 October – the date the UK is meant to leave the European Union – but we could still find ourselves heading to the polls before the end of the year.
If Prime Minister Boris Johnson fails to get a deal from the EU at a scheduled meeting on 17 October, MPs will almost certainly insist that he ask for an extension of the Brexit deadline until at least 31 January.
Should Johnson comply, the chances of him calling a snap election will rise considerably – and so too could the chances of a Jeremy Corbyn-led government.
Many in the City fear Corbyn’s anti-business rhetoric could hit the economy – and therefore investors’ pockets. So how can you prepare?
Below, Kames Capital’s investment team looks at strategies to protect your portfolio from any potential downside as election risk grows.
Areas to avoid
Colin Dryburgh, investment manager in Kames’ Multi-asset team, says there are threats to both bond and equity investors across UK utilities.
“Corbyn’s nationalisation policies pose an obvious threat to several parts of the UK equity and corporate bond markets, such as water, energy supply and Private Finance Initiative (PFI) related investments,” he says.
Adrian Hull, head of fixed income at Kames, adds: “Corbyn’s higher tax takes and dilution of share register to give away to employees isn’t the stuff of higher share prices.
“Corbyn proofing is inextricably tied up with Brexit. Whilst no deal Brexit seems less likely this evening it would be a brave person who sees Corbyn seeking a revocation Article 50. Corbyn’s instincts are anti-EU and anti-business elites; that’s a tough environment for UK asset performance.”
The jury is out on gilts, however. While it might be expected that they would see yields climb and prices fall as assets are expropriated by the government via higher spending, Hull says they aren’t a “compelling sell” in a Corbyn-led UK.
“Gilts look cheap against other major European bond markets and despite the Brexit doom and gloom the Bank has not emphatically guided to the next rate move being a cut,” he says.
“Moreover, increased fiscal spend may be done QE style in conjunction with the Bank and may not pull the rug on valuations. Mainstream concerns around the flight of capital from the UK and a subsequent weakness in the economy could also actually support gilts.”
“Buying index-linked bonds may seem smart but long linkers have collapsed courtesy of the review of the RPI measure compared to CPI announced today. Index-linked bonds perform on weaker sterling, and despite Westminster shenanigans the pound has appreciated as Boris’s no deal has been cut away at the knees by Parliament.”
Areas to invest
While certain equities look off limits, Dryburgh believes other areas could ultimately get an uplift from Corbyn.
“Finding potential investment beneficiaries from a Corbyn government is harder than identifying assets that could suffer, but one area would be construction and civil engineering related investments that would likely benefit from higher levels of public spending,” he says.
“The overall impact on the equity market would at least be partly driven by sterling and that in turn will be driven by the path of Brexit events, as well as who is the UK’s next Prime Minister. A weaker sterling would likely benefit large companies with a high proportion of overseas earnings.”
Overseas currencies could be appealing to investors, Hull adds, as could some large UK firms which earn their revenues in other currencies.
“Own more dollar, yen and other overseas currencies, and less sterling. Euros could also be an option, but to date the UK’s Brexit problem has also been Europe’s growth problem,” he says.
“Within equity markets, own global rather than UK where you can. However, typically investors who have owned FTSE 100 companies have done well as weaker sterling translates to higher sterling profits.”