A look at two key policies
The Conservatives are looking wobbly and many people have asked what actions they should take in the event that Corbyn becomes Prime Minister within the next two years.
It's a valid question since we haven't had a Labour government in around 7 Years.
In this article I’m going to explain what a Labour government would mean for the stock market and how you can take advantage of the volatility it would offer in relation to two key policies;
The £10 minimum wage and Renationalisation of old state monopolies.
There’ll be no partisan political alliance here – I’m going to talk cold hard facts.
I don’t think anyone is convinced by Theresa May’s deal with DUP. Not even her own party. Commanding such a slender majority in the house of commons is bound to have an adverse effect on governing.
We’ve been on a stock market rally since 2009 with the FTSE100 climbing from 5,000 to 7500. Despite Brexit and despite a calamitous result for May & Co.
So, would the market continue to rise with another shock to the system in the form of PM Corbyn or would the house of cards begin to fall?
Who knows, the point of this article isn’t to predict or prophesize over a market collapse. Only a fool would claim to have a crystal ball.
Here I seek to answer these two questions;
i) How do I think the market the stock market would react to proposed Labour government?
ii) How could I take advantage of any volatility?
Firstly a disclaimer, I’m a Labour party member and voted Labour this election, but, I’d be lying if I said I think a Labour government would be a good for the stock market.
Corbyn has, whatever your personal opinion, some policies that would spook the stock market;
- Raise the minimum wage to £10 an hour (even for 16 year olds)
- Re-nationalise the old state monopolies
- Separate retail and investment banking
Please note I'm not here to debate the pros and cons of such policies just the effect these would have on the stock market. Nothing more, nothing less.
Let’s start this series of articles with the two that I think will have most impact. The £10 minimum wage and Renationalisation of old state monopolies.
How would the market react to Corbyn’s £10 minimum wage?
The £10 minimum wage will almost certainly cause some short to medium term volatility for low-skilled labour intensive businesses.
A company like Whitbread instantly springs to mind.
Whitbread own and operate Premier Inn and Costa Coffee and it’s estimated that the previous minimum wage hike to ‘the living wage’ from £6.70 in 2015 to £7.20 in 2016 (currently £7.50) cost the business around £20million.
If we crudely accept 50p rise cost the business around £20 million a £2.50 rise from current levels would cost the business up to £100 million, maybe even more due to 16 year olds getting a huge hike.
Personally, I think that paying 16 year olds a £10 an hour is a leap too far and will price them out of the employment market. Why hire a 16 year old kid with little experience when you can hire a 25 year old with job history for the same money? It’s an employers market after all.
But we’re not here for my poliical opinons.
How to take advantage
Besides the social effects, such a policy move would see an instant downturn in the stock price of UK-Focused companies such as Whitbread, Next, Tesco and so on.
But, away from being a cause for alarm, I think this would be a great buying opportunity.
I don’t think this policy would have as much as an impact on the long term performance of UK-Focused companies as the stock market may think.
Yes, paying £10 an hour sounds horrible to companies, but they’ll just plough ahead with cost cutting measures and price inflation to make up the difference.
Speak to anyone working for, Tesco for example, and they’ll tell you that they’re over-time is being curbed, staff perks cancelled and pension schemes trimmed in an effort to make up for minnimum wage hikes.
Credit: Asda UK
Asda even scrapped free tea and toast for its workers (a move sure to make Brits furious)
Plus, whether we like it or not, we’re moving towards an autonomous future with the need for staff sure to reduce over time.
So, FrugalStudent says buy such companies, subject to fundamentals, on a dip (if one materialises) under a Corbyn premiership and wait for cost cutting measures to mitigate the effects.
Agree? Then tweet your support!
@LewysAron says -BUY- Businesses like WTB on the dip if we get a £10 Minimum wage. I AGREE - Here's why:https://goo.gl/eLHAvR
How would the market react to Renationalising the old state monopolies?
Corbyn has set his sights on the old state monopolies so what does this mean to shareholders of Royal Mail for example?
Royal Mail is top on the hitlist so let’s take a look.
I couldn’t find a direct cost for how much Labour thinks it would cost to renationalise Royal Mail but a recent post by Momentum (credited with much of Corbyn’s success) put the figure, somewhat confusingly at £0.8bn.
£0.8bn? Half would cost £2bn + at today's price.
A figure this low would certainly be alarming for shareholders as it would appear that the government plans to rip them off with Royal Mail’s current market cap standing at over 5x that amount, north of £4bn.
Supporters of the move have clarified that the government would seek to buy back 50% + 1Share, but that still leaves the cost standing at over £2bn.
Most concerning for the remaining 49.9% of investors is that Labour has said that it .would be an end to dividend payments. of nationalised companies once the government takes a grip on the reigns.
Such a move by the government would be certain to spook investors and lead do a drop in the share prices of acquired targets, future targets and even potential targets.
So what would Labour Nationalise? These former state owned monopolies are the current targets;
- Water companies such as Severn Trent, United Utilities, Pennon Group.
- Royal Mail
- The 'Big 6' energy firms such as Centrica and SSE
These companies dependant on government franchise contracts could also be at risk;
- First Group, Stagecoach, Arriva
Credit: Mirror UK.
How to take advantage
FrugalStudent recommends extreme caution when buying into any of the above companies and any potential targets for nationalisation. An end in Dividend Payments would destroy shareholder value and substantially increase the risk of holding the remaining 49.9% of shares.
However, we need to remember that most of the affected companies are multinational and they will be left to operate in other markets. For example, Centrica, SSE, StageCoach and First Group all have Europe-wide operations. Despite this, the potential loss of the UK market to government operations would be devastating in most cases.
Long term investors may want to buy in on a dip in the hopes of a return to private ownership in future or expansion in other markets - but anyone doing so would be in for a bumpy ride!
Some more adventurous investors may look to short the stocks of such companies – but that’s not for me!
I do feel the need to add a cautionary note in regards to the future of other, less obvious, industries which may be in the longer term sight for nationalisation too.
Banking instantly comes to mind.
Although it may be too early to start thinking of the effects on such industries yet, it’s worth baring in mind.
Corbyn's stances on Defence may also have a negative effect on defence companies such as Lockheed Martin and BAE Systems that I may cover in the next article although I don't invest in such companies for personal reasons.
In this article I have outlined the effects and the opportunities presented by a £10 minimum wage and the renationalisation of the old state monopolies. This article is neither a case for or against the above policies and focuses soley on the outcome for the shares of companies. There are very real benefits to nationalisation and public ownership is somewhat the norm across Europe.
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