Something new to watch on the political front

Tuesday, 7th May 2019 14:42 - by Shant

Utility companies in the UK are coming under pressure as the Brexit saga has led to fresh developments which ultimately, could see Labour potentially return to power.  In this instance, Labour would push for plans to enact its renationalisation plans on water companies according to a Labour party briefing document reported in the weekend press. 

Adding to the controversy, the party would look to only reimburse investors for investment so far, with £20bln earmarked for the buyback compared to the current aggregate industry valuation of £44bln, citing recompense for future profits do not need to be addressed as it will transfer back into a non-profit making industry.  In an interview on the weekend, the shadow chancellor John McDonnell admitted that the money would be borrowed, as the income raised from what is and has been a strong revenue generator, would pay off the costs of the process. There is a conflict of ideology here, yet household savings are the underlying rationale behind this proposed process.  

Industry representatives have naturally been against the idea, not least of all from the losses which will be suffered by pension funds - a notion which hits the man on the street, and not just the perceived 'unaccountable fat cats' to paraphrase the Director General of the CBI Carolyn Fairburn.  Fairburn has asked for Labour to work with business, though in the Labour camps, this has somewhat been expectantly dismissed.   Given foreign investors have also put money into these utilities, there will also be legal ramifications should Labour plans somehow come to see the light.  There will be broader implications for UK investment, but this 'route one' agenda has excluded future national consequences many a time before. 

This is all based on the premise that the opposition party stands to win in the next election as a function of the implosion seen within the Tory party, though last week's local elections paint a very different picture.  Nevertheless, Labour plans have 'ripped the rug' from under what we traditionally seen as safer stocks.  Along with pharma, and food and grocery, utilities are among the safe havens within the equity markets, but this latest news will clearly unnerve investors on all timeframes at a time when political stability in the UK is all but shot.  

To this end, looking at two of the major water companies in the FTSE 100, United Utilities and Severn Trent have clearly reacted to the leaked documents, which as I noted, have been backed up by fresh comments over the weekend.  United Utilities has fallen below the 800.00 mark, setting new lows since mid-January this year.  Severn Trent also lost ground, shedding close to 50pts, but has recovered as part of the sectoral shifts we have seen today amid wider market stresses.  Comments from president Trump that he will press ahead with raising tariffs on more Chinese goods have set off fresh turbulence across global markets, and the usual suspects including banks and commodity-based names have been the hardest hit today.  In contrast, pharmaceuticals are the outperformers, with AstraZeneca, Smith and Nephew and Hikma Pharma all making healthy gains on the day amid the broader risk backdrop.  Notable exceptions from the top of the list are the utility companies, though Severn Trent was almost back to flat on the day.  

Labour's nationalisation plans are unlikely to stop at the water companies, with energy companies across the board as well as Royal Mail also likely to be on the opposition party's radar.  Royal Mail has faced nationalisation fears in the past, and on its return to trade on Tuesday, was down over 2.5%.  Rail operators will also likely be in the frame for an overhaul, though starting off with the water companies, investor sentiment has been rocked, irrespective of how far down the line, and indeed whether Labour can benefit from the government's dramatic losses in the polls at the hands of the current Brexit impasse.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.