For a while in 2017, it seemed as if the worldwide tide of populism, epitomised by Donald Trump, had reached its high-water mark. In a string of elections across Europe, the populist right and the left had failed to break through. Emmanuel Macron was elected President of France, and although not from any of the traditional mainstream parties, here clearly was a man of the centre. In the UK, Theresa May called a snap election while 20 points ahead in the opinion polls. Even days before the vote, senior Tory strategists were predicting a 90-100 seat majority.

The populist surge remains blunted in Europe, and Donald Trump may face a difficult mid-term election in a year’s time in the US. But oh, how different things are here in the UK.

 

Jeremy Corbyn vs Theresa May – who’s in the lead now?

Despite losing the popular vote and lagging the Conservatives by 55 seats in the election, there is no debate about which party is in the ascendancy now, Labour has a consistent opinion poll lead over the Tories of 2-3%. At the recent autumn Labour Party conference, we saw a level of self-confidence absent since Jeremy Corbyn was elected leader. Representatives of the party are now accorded a respectful ear in the halls of the Confederation of British Industry (CBI) and other business organisations.

A Theresa May vs Jeremy Corbyn poll, conducted by YouGov in early October 2017, showed a three-point gap between the Tory and Labour leader – down from eight points just two weeks earlier[1].

 

Jeremy Corbyn’s chances of winning an election

The most successful populists, like Trump, have won largely by co-opting the machinery of an established party and building a rock-steady core base of support. Initially, it seemed Jeremy Corbyn would fail to replicate this, and his chances were dismissed as risible.

But in the June election, he managed to pull precisely the same trick as Donald Trump. He secured the support of those who tribally could not vote for the other side, including many that had recently defected to UKIP in the run-up to the Brexit referendum, and at the same time seized the votes of the previously apathetic young as his core base. If he can repeat this, Jeremy Corbyn seems electable, particularly faced with weakened opponents, even if we still don’t think this likely.

 

The potential impact of Labour policies

Although policies can change over time, there are certain general constants that are likely policies of a future Labour government. Under Jeremy Corbyn, the Labour Party is committed to:

• Nationalising, or at least socialising, a range of sectors, including the railways, water companies, the electrical power grid and the Royal Mail
• Placing restraints on the banking sector, including special plans for RBS
• Bringing Private Finance Initiative (PFI) contracts back under state control
• Raising the minimum wage
• Banning zero hours contracts.

There is a general commitment to more spending on infrastructure, health, social housing, education and sustainable energy, financed by higher taxation on companies and the top 5% of earners, and a clamp-down on tax evasion, as well as higher borrowing. Interestingly, there was also a commitment to balance the budget in the medium to longer term.

 

The effect of Jeremy Corbyn’s policies on financial markets

Of course, Jeremy Corbyn still has to get himself elected, and his policies are likely to be put under sharper scrutiny by both the press and the Tories next time round.

However, if he were to be elected, what would these policies mean for markets? We think a mix of the following could occur as it became apparent Labour was going to win:

• Sterling would fall sharply – triggering a classic ‘run on the pound’
• Government bond yields would rise
• Shares in banks, utilities, housebuilders, transport, support services, hotels and pubs, retailers and infrastructure trusts would fall
• Shares in overseas earners such as the energy companies, miners and pharmaceuticals would benefit from a lower pound and rise
• London house prices would come under pressure.

 

… and the effect of financial markets on Jeremy Corbyn’s policies

Ultimately, markets are likely to constrain Prime Minister Corbyn’s freedom of action. There are several examples in history of left-wing governments that have been forced to change direction in the face of crumbling currencies and rising bond yields.

 

A brief history of left-wing policies

Back in the early 1980s, François Mitterrand was elected President of France on a sweeping left-wing platform not dissimilar to Jeremy Corbyn’s. It involved nationalising the banks, car makers and steel industry, higher taxation and higher spending. After 18 months he had to change tack, cut spending and embrace a more market-oriented set of policies, helping to kick-start a 15-year bull market.

More recently Alexis Tsipras was elected Prime Minister of Greece on a radical left-wing, anti-austerity agenda. Yet within months he had signed up to the package of austerity reforms forced upon him by the EU and the International Monetary Fund (IMF). Of course, in the meantime, the Athens stock exchange had fallen almost 50%, 10-year Greek government bond yields had shot up to over 19% (they’re 5.4% today) and the banking system had been effectively decimated. Once he bowed to his creditors, the equity market rebounded, and is now up around 70% from its low.

 

Preparing for all eventualities

When it comes to an election between Theresa May and Jeremy Corbyn, we don’t yet expect Corbyn will turn his current poll strength into a majority-winning position. However, we will monitor his progress with care.

In the meantime, we remain significantly underweight UK equities, based on the poor economic and corporate fundamentals, even without the threat posed by a Corbyn victory. Recent history has taught us not to write off the seeming improbable in politics. We would have to debate the idea of reducing our UK exposure even further if Jeremy Corbyn’s momentum strengthened from here. In the meantime, we are finding plenty of opportunities in equities outside the UK, where fundamentals look much more attractive.

[1] http://www.telegraph.co.uk/news/2017/10/06/jeremy-corbyn-closes-gap-theresa-may-slumps-second-lowest-rating/