How to Corbyn-proof your investment portfolio

The prospect of a Corbyn government has long spooked investors, private and institutional alike.

With Brexit still stuck at an impasse and the government now unable to command a majority, a general election at some point soon looks likely.

While the Conservative Party is currently leading in the polls, the prospect of a Labour government led by Jeremy Corbyn is not totally out of the question. This possibility has long spooked investors, private and institutional alike.

Below, we run through some of the strategies and threats of a Corbyn-led Labour government, identified by Kames Capital's investment team.

According to Colin Dryburgh, investment manager in Kames' multi-asset team, one of the biggest threats to bond and equity holders in UK utilities. Members of Labour's shadow cabinet have repeatedly warned that they plan to bring certain utility firms back under state ownership.  

Dryburgh notes:

"Corbyn's nationalisation policies pose an obvious threat to several parts of the UK equity and corporate bond markets, such as water, energy supply and Private Finance Initiative (PFI) related investments."

Meanwhile, Adrian Hull, head of fixed income at Kames, says:

"Corbyn's higher tax takes and dilution of share register to give away to employees isn’t the stuff of higher share prices."

When it comes to bonds, however, the picture is less clear. It is now widely expected that yields would rise in the event of a Corbyn government on the back of expected large increases in public spending.

However, says Hull, there are reasons to believe that bonds valuations may hold up. First of all, he argues that gilts already look cheap compared to the European counterparts.

At the same time, he argues: "Increased fiscal spending may be done quantitative easing style in conjunction with the Bank and may not pull the rug on valuations. Mainstream concerns around the flight of capital from the UK and a subsequent weakness in the economy could also actually support gilts."

What might do well?

"Finding potential investment beneficiaries from a Corbyn government is harder than identifying assets that could suffer," notes Dryburgh.

However, there are still some sectors which could see some uplift. Dryburgh says:

"One area would be construction and civil engineering related investments that would likely benefit from higher levels of public spending."

At the same time, both Dryburgh and Hull note the potential for a run on the pound to benefit global facing companies. Dryburgh notes: "A weaker sterling would likely benefit large companies with a high proportion of overseas earnings."

As has been widely covered since the Brexit referendum initially sunk the pound, weak sterling is good for the FTSE 100, which derives roughly 70% of its earnings from abroad.