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Courtesy of the Telegraph.
The prospect of a radical Left-wing lurch under Jeremy Corbyn is a more serious threat to British asset markets than Brexit and risks setting off a drastic repricing of UK plc, a leading US bank has warned.M organ Stanley has told clients that there is a two-thirds likelihood of snap elections in the second half of 2018 once it becomes clear that the UK cannot secure the sort of Brexit deal it wants and the Conservative Party starts to fracture, bringing political risk into sharp focus. “We could see the biggest shake-up in the political backdrop since the Seventies. This is much more scary from an equity perspective than Brexit,” said Graham Secker, the bank’s chief European equity strategist.
The bank said the "double whammy" of Brexit and a Labour government together could prove toxic for UK stock markets, with the bank’s full-blown ‘bear case’ leading to an economic recession and a 32pc crash in the FTSE 100 index by 2019. Gilts could also face a reckoning given that 10-year yields are trading at 1.26pc while inflation is running at 3pc, with a further depreciation of sterling on the cards. “Bond investors are losing money faster in the UK than almost anywhere in the world,” said Andrew Sheets, the bank’s global asset strategist.
Fund managers must plan for the serious possibility that a developed OECD country may nationalise power utilities, water companies, mail delivery, and rail transport in sweeping moves unseen in the trading life of most investors now alive.
The new agenda includes a rise in corporation tax to 26pc, a surtax on financial entities, and a financial transactions tax or "Robin Hood" tax on derivatives and bonds, as well as some shares. “The direction of travel we have seen for the last 30 years is going to change by 180 degrees,” he said. The thrust of policy would shift “in favour of labour over capital” with rises in the minimum wage, an end to the public sector pay cap, and a revival of sectoral collective bargaining. This would erode profits, especially for low-margin firms such as retailers. “Even if we see good progress in the Brexit negotiations, the scope for UK sensitive assets to rally may be muted, unless we also see an improvement in the Government’s position in the opinion polls,” said Mr Secker.
Worries about a duumvirate of Jeremy Corbyn and John McDonnell – the ‘Marx Brothers’ as they are known in the City – are approaching systemic levels. One senior banker told The Telegraph last week that even family owned-firms are exploring cashing in their wealth before the guillotine comes down, either in the form of a higher capital gains or ultimately through de facto wealth confiscation. The sense of unease has faint echoes of the "red scare" that gripped French investors before Leon Blum’s Front Populaire swept to victory in 1936. City veterans no longer rule out capital controls. Emma Marcegaglia, head of the pan-EU lobby BusinessEurope, said Labour’s apparent tilt towards a softer Brexit would not compensate for the damaging effects of its radical policy manifesto. “What Corbyn proposed during the election campaign is not pro-business, that is for sure. There would not be a good outcome even if there is a fantastic free trade agreement,” she told The Daily Telegraph.
Mrs Marcegaglia said her members are pushing the EU institutions to take an open and friendly line in Brexit talks but also warned the British side to eschew wishful thinking. “The UK must put concrete proposals on the table otherwise things are just going to get worse and worse,” she said.