On Wednesday I was speaking at a conference in London explaining that – with political risk and uncertainty here to stay – active management was needed now more than ever. Right on cue, the Labour Party duly delivered its manifesto the next day.
Let’s leave aside the political ideology and the satisfaction of giving train companies a kick for now. I want to focus on the strategy required to mitigate the economic risks of implementing this manifesto and whether we should seriously consider executing it.
As I write, the chances of Labour winning seem remote, although it should not be discounted, popularist policies can win! Fortunately the strategy to mitigate Brexit risk can also work for manifesto risk. Why? Because the economic policies (in particular, higher corporate and income taxes) in Labour’s manifesto exacerbate Brexit risk. So it’s ‘Brexit squared’ if you like?
Taxed for the pleasure of an uncertain future
At this time of great uncertainty we need overseas companies to remain invested in the UK. We need those individuals who have brought their intellectual capital to the UK to stay and contribute to the economy in terms of their innovation, productivity and, indeed, tax revenue. Telling these individuals and corporations that not only do we not know what our trading arrangements are going to be post Brexit, but we are also going to tax you more for the pleasure, seems totally illogical.
And what domestic companies, when future revenues are less certain, are going to invest capital or employ more workers if they see the risk of an additional tax burden?
A vicious circle leading to the International Monetary Fund (IMF)?
What does this mean for markets? In my opinion adding significant debt and then spending heavily so quickly will exacerbate the stagflationary threat I have referred to previously. Gilt yields could rise quickly and steeply. Sterling falls and negative yields could appear throughout all income producing asset classes. Strategy – avoid. Of course, rising gilt yields would increase government borrowing costs, so borrowing would have to increase - a vicious circle that normally ends in a call to the Citizens Advice Bureau for us, or the IMF for the government. Cannot happen, can it?
Inflation is clearly very bad for ex-growth companies, so I avoid these equities. Increased intervention from politicians and unions, leading to reduced innovation, competition and increased bureaucracy is very negative for companies with domestic revenues – I avoid these too. I focus instead on overseas earners and overseas markets – exactly the same as Brexit mitigation. Just dial it up. The case for active management just got even more compelling.