How would markets react to a Labour government?

The divisiveness of Brexit threatens to spill over into a general election as Labour leader Jeremy Corbyn prepares to take his second shot at securing the keys to Number 10. The opposition party tabled a vote of no confidence in the Conservative government immediately after UK Prime Minister Theresa May’s Brexit deal was rejected by the House of Commons. With support from other parties, he hopes to effectively oust the government to force a general election.

Read more: Corbyn tables no confidence vote after May’s Brexit plan is rejected

Corbyn believes this is a way to both gather a consensus from the public on what sort of Brexit to pursue, while reviving the debate about policies on the likes of housing and healthcare that have been brushed under the rug over the last two years. However, any general election will be decided by what stance both Labour and the Conservative government adopt on Brexit, not the underlying domestic policies that would still have a major impact on the economy regardless of the state of the UK past March 29 this year.

Read more: Where next for Brexit?

We have a look at how a Labour government would affect Brexit and what the impact of its other domestic policies could have on businesses and markets.

What is Labour’s position on Brexit?

Like the majority of the House of Commons, Labour has been steadfast in its attempts to block any of the prime minister’s routes to secure some form of orderly Brexit without proposing an alternative avenue to go down.

Read more: FTSE 100 slides as pound rises following Brexit deal defeat

As the opposition party, Labour has been under increasing pressure to back a second referendum on Brexit. However, Corbyn has insisted he will only seek the party’s preferred route – whether that be a second vote, a customs union or another option – once a general election has been called. While asking the public again remains the most likely option there is no guarantee what Brexit strategy Labour will use to try to sway a divided public: Corbyn has said all options must be put back on the table.

The Labour leader revealed further reluctance to support a second referendum in a speech before the vote on May’s deal. Addressing EU counterparts, Corbyn said the EU would be inclined agree to a postponement to the UK’s departure to allow time to 'renegotiate' a new deal with a new government and avoid a disorderly divorce. The party states it 'accepts the referendum result' and wants to 'build a close co-operative future relationship with the EU, not as members but as partners'. This position puts Corbyn and the official party stance on a collision course with a large number of anti-Brexit party members.

What would happen to Brexit under a Labour government?

First and foremost, Article 50 would be extended and Brexit would be delayed as Labour has said it would not allow the UK to leave the EU without a deal or a transition period. Labour has said it would scrap the Conservative’s plans and start over with the EU, kickstarting a fresh round of negotiations based on priorities that have a 'strong emphasis on retaining the benefits of the single market and the customs union'.

Labour has been criticised for its position on Brexit. This is mainly because the ‘six tests’ are unattainable and securing a deal that provides the same benefits the UK enjoys today is impossible. Nothing is certain, but a Labour government raises the chances of a softer Brexit and the possibility the UK reverses its decision to leave the EU altogether.

What would a Labour government mean for markets?

Corbyn defied his critics when the May lost her gamble in the 2017 general election. Although the Conservatives current tie-up with Northern Ireland’s Democratic Unionist Party (DUP) kept Corbyn out of Downing Street the government’s majority is fragile (particularly because of the party divide on Brexit), and his commitment to make an economy that works 'for the many, not the few' saw Labour secure its biggest share of the ballot since 2001.

The hard-line against what it describes as a 'rigged economy' and promises to shift income tax to the wealthiest of people has proven popular with the public, many of which are fed-up with years of austerity and the decade of stagnation since the financial crisis. But such radical proposals and stern language – such as promising to make the economy work for 'people, not profiteers' – is not a welcome proposal for business or financial markets. Corbyn and the would-be Chancellor of the Exchequer John McDonnell are both proud socialists, which paints a very different vision to that of capitalists.

A survey of FTSE 100 chairs by global consulting firm Korn Ferry late last year showed four out of five leaders of the country’s blue-chip stocks believed Corbyn becoming prime minister was more harmful to their prospects than anything Brexit could throw at them – a stark statement amid the chaos the country is going through.

While Labour has won over the backing of business for its softer stance on Brexit, particularly on the ideas of a customs union, the party’s domestic policy is just too radical for business to accept. US bank Morgan Stanley has previously warned that the threat of higher taxes, nationalisation and a shift in spending policy could hurt UK company valuations.

How will Labour’s corporation tax plans impact markets and Brexit?

Wealthier individuals and businesses would be expected to foot the bill under a Labour government. Those earning over £80,000 per year are within the party’s crosshairs and the gradual cuts being made by the Conservative government to corporation tax (currently sat at 19% with further cuts pencilled in) would be reversed and hiked to 25%-30%. Labour argues business simply isn’t paying enough and needs to share more of the burden so the majority of people – the poorest 95% according to Labour – don’t have to pay any tax whatsoever.

Problem is, raising corporation tax is already a hard-sell to business. Many believe the UK needs to head down an avenue toward lower taxation as the country looks for a competitive edge in a new era of international trade. Plus, Corbyn’s other policies to empower employees, raise wages and for more low-income spending points towards higher costs for businesses and less taxpayer money for them to vie for.

How will Labour’s policies on worker’s rights impact markets?

Improving worker’s rights and pay is at the heart of Labour policy. Long-established corporate governance measures would be overhauled to give employees a greater influence over company boards, and even mid-sized businesses would need to share a slice of their profits with workers.

In September, McDonnell floated the idea that all companies with over 250 employees could be required to pay up to 10% of their equity into a trust that would distribute dividends to workers up to a limit of £500 per year. Importantly, anything paid above that limit would be funnelled to the government’s purse. Some, including May, have criticised such a plan because it effectively taxes both companies and people.

How will Labour’s low-income priorities impact stocks?

The commitment to raise the minimum wage and push up lower-income salaries means industries reliant on low-cost workers, such as retailers, will see margins come under further pressure. This will hit some industries that are already desperately fighting to survive, such as those on the high street like Debenhams.

Read more: How is the UK commercial property sector performing?

According to official parliament figures, between 20% to 36% of UK workers in the hospitality, cleaning, food processing, beauty, and textiles industries are all paid the National Living Wage or less. The likes of supermarkets and restaurants would be exposed. It is these types of companies that would see upward pressure on wages – almost always a company’s biggest outgoing – and margins tighten.

How will Labour’s digital tax plans impact online tech stocks?

Labour has committed to helping the ailing high street by hiking taxes on the online competition that has fairly stole its business. This involves targeting the world’s biggest companies like Amazon and Alphabet's Google.

The party also wants to introduce new taxes on content providers like Facebook and Netflix to subsidise the BBC licence fee. Corbyn said last August that his plans to shake up the media sector were necessary to stop 'a few tech giants and unaccountable billionaires' manipulating the public debate.

Read more: What you need to know about Britain’s Digital Services Tax

How will Labour’s spending plans impact stocks?

Labour wants to unravel the years of austerity imposed by the Conservative government and increase borrowing to invest in public services. The party’s spending policies are the opposite of what the UK has adhered to for the last nine years, which brings both good news and bad for businesses. The focus on low-income spending threatens to funnel money away from some sectors while higher infrastructure budgets could prove beneficial to others.

Attitudes toward private companies earning money off the taxpayer in public sectors like the NHS suggest outsourcers that rely on government contracts could be in for a rude awakening. This includes firms like G4S and Serco Group that are responsible for managing prisons and other government facilities. Defence budgets are also at risk of being reviewed, potentially impacting companies like BAE Systems and Rolls Royce.

The construction sector could benefit from the introduction of Labour’s spending plans. This includes both housebuilders and infrastructure developers such as Balfour Beatty and Kier Group. Although, the troubles of firms like Carillion and Interserve could prompt Labour to review how public-private work is conducted in the future. Those operating in social care could also benefit as the private sector is vital to a critically under-funded care system.

How would a Labour government impact banks and financial services?

Some have suggested chasing higher levels of taxation could be harmful to the financial services industry, and Labour has made it known that it doesn’t like the big banks. As far is Corbyn is concerned, they were all let-off after plunging the country and the world into the financial crisis of 2008.

One possible policy Labour is considering is launching a state-owned bank to rival the private market, which some suggest places Royal Bank of Scotland – which the taxpayer still owns with more than a 60% stake – at risk. Labour could look to use RBS as a vehicle to launch such a bank. Although the Conservatives have been selling down its stake in the bank since the bailout, any calls to use RBS to create a state-owned alternative is stronger amid the fact billions has been lost selling down the stake in recent years.

What industries does Labour want to nationalise?

The poor performance of several industries and the government’s failure to address major issues has opened up the debate as to whether key industries should be renationalised. Energy, water and rail companies are considered most at risk. This could impact suppliers like Severn Trent, United Utilities, National Grid, Centrica and SSE, as well as rail and public transport operators such as Go-Ahead Group, Stagecoach Group and National Express.

Royal Mail is a serious possibility. On the radar but less likely are telecommunication companies such as BT Group.

How to trade a Labour government coming to power

It is important to remember that Labour will publish a new manifesto should a general election be called, meaning its exact policies are not yet known. However, it is likely that many of the commitments made in the last election and the party’s current ambitions will prevail to form the basis of the party’s promises.

One acute risk for investors is getting caught-up in any herd mentality that ensues under a Labour victory and underappreciating the difficulty Corbyn may have in introducing such a change in policy direction. For example, UK utility firms have high levels of foreign ownership which could cause a problem for a government trying to bring their investments back under state control. Plus, Conservative efforts to introduce a digital tax and renationalise the East Coast rail system all detract from the uniqueness of some of Labour’s key policies.

At the bottom line, even if business warmed to Corbyn’s vision the severity of the changes is simply too much to bear at a time when Brexit is reshaping everything global markets has built over the decades.