The UK will go to the polls on the 12th December for the third time in five years in a bid to resolve the Brexit impasse.

The polarisation of UK politics with the leave/remain question cutting across traditional party divides, makes the forthcoming election very hard to predict with the Brexit Party and Liberal Democrats having an important part to play.  While polls indicate the Conservatives will be the largest party in the new Parliament aided by the decision of Nigel Farage’s Brexit Party not to contest seats with an incumbent Conservative MP, there is no certainty they will be able to form a majority government. The prospect of a Labour led coalition inevitably raises concerns over the impact of this type of government on investors and whether there is any merit in seeking to protect assets or accelerate planning.

Political parties have yet to publish their manifestos but from election campaigning so far it is clear that both major parties will promise significant increases in government spending, limiting scope for tax cuts.  In the case of the Labour Party significant changes to personal and corporate taxes are expected to fund more lavish spending plans while further impacting investors through policies such as its workers ownership plan where companies will donate 10% of their shares to employees over a 10 year period.

Firstly it is worth noting that the expectations of a majority Labour government, enabling them to enact some of their most radical policies seems unlikely and while an agreement with the Scottish Nationalist Party (SNP) would increase instability if second Scottish independence and EU leave/remain referendums follow, working with a partner is likely to restrict the ability to pass legislation on more extreme policies.

In the event of a market unfriendly policy being introduced the best defence for most individuals will remain diversification at all levels, including by geography.  This minimises the impact of political or economic instability in any single part of the world including the UK.   Exposure to overseas assets, which has been the case since the Brexit referendum, can protect against the negative impact on sterling of a Labour government and limit exposure to the UK economy.

Certain areas of the stock market where the Labour party have made clear their intentions to renationalise companies, including utilities and the Royal Mail, would be vulnerable, although attractively valued should a Conservative government attain power with a majority.

The issuance of government bonds would need to increase substantially to enable a Labour government to fulfil its pledges to nationalise areas of the economy, and meet its public spending intentions. This would be expected to lead to an increase in yields and the possibility of higher inflation.   Government bonds offer historically low yields and are generally underweight in portfolios.

More general planning issues which may be considered before the election include making gifts under the current Inheritance Tax regime, reducing equity exposure and taking capital gains to avoid the impact of any increase in the Capital Gains Tax rate and using allowances to contribute to ISAs and pensions.

Given that the probability of a Labour majority government is considered to be relatively low, constructing a portfolio to perform only in that scenario is not advisable.  If the election results in the latest EU withdrawal agreement being implemented, the prospect of an orderly exit  should be positive for confidence in the UK economy and help to reduce the discount at which UK shares stand compared to other developed markets.  Sterling would be expected to strengthen, again a positive for more domestically focused businesses with overseas earnings reducing in value. The question of what happens at the end of the transition period in December 2020 would remain however.

With the UK electorate polarised and polls unreliable there is the prospect that no party will obtain a majority. While this will not help to resolve the Brexit impasse on the face of it, it may force a cross party solution resulting in a softer Brexit outcome or a second referendum meaning the prospects of a disruptive “no deal” exit are reduced further and that the Labour party is unlikely to have the opportunity to implement its full range of policies.

Sensible planning measures such as using ISA and pension allowances and considering crystallising capital gains are certainly worth considering. We would not advocate any large scale re-organisation from current investment strategies which will already provide substantial diversification benefits and limited reliance on the UK. The election should also be seen in the wider context of the global economy and political developments.  Important questions such as the direction of US monetary policy, the resolution or not of the US China trade war and the outcome of the US presidential election next year are all just as, if not more, important.

Please get in touch if you have any particular questions.  We will follow up with another commentary closer to the election date.






























13 November 2019