Why I think Labour could trigger a great stock market crash in 2020

Some of my Fool colleagues have written about the risks of a big stock market crash in 2020, based on slowing growth, softening earnings forecasts, and related things. But I want to look at politics, and I think a Labour election victory could have a very big impact.

Nationalisation

It’s not just nationalisation, but I’ll start with that. Labour plans to take the big energy and water firms, like National Grid and United Utilities back into state ownership, together with Royal Mail, the broadband business of BT, and the railways.

Looking just at the targeted companies in the FTSE 100, I estimate they add up to a total market capitalisation of approximately £81bn. That’s the amount of capital currently owned by investors that would be converted into government bonds at a valuation to be decided by Labour. If investors had wanted government bonds then that’s what they’d have bought instead of shares, and it might not be the best time to sell them with everyone presumably trying to do the same.

Turnover

These companies also represent about £90bn in annual turnover, based on their last full-year figures, and that’s a lot of business to be handed over to government to manage. If anyone thinks government can provide better service to consumers, then I think they’re either too idealistic or too young to remember what that was like in the old days.

Under a BT state monopoly, we weren’t even allowed to own our own phones and had to rent them, and I still shudder thinking of the hours I spent sitting huddled in freezing cold railway carriages with no facilities, and almost never arriving on time. But I digress.

This is a significant chunk of the market to be taken away, and that alone would surely have a negative effect on investment generally as shareholders try to rationalise what they’re left with.

Business overhaul

Things wouldn’t stop there, as Labour’s plans include what some have described as a corporate governance revolution, elevating workers to a third of the positions on company boards and giving them a forced share of company profits. Under shadow chancellor John McDonnell’s plans, listed companies would have to transfer 1% of their shares to a new employee ownership fund every year for 10 years.

There would also be an £11bn scheme to retrain North Sea oil workers, and oil and gas companies would forced to pay for it, and all sorts of encouragements for would-be entrepreneurs would be scrapped.

In all, it would be the biggest assault on the free market that we’ve seen for generations, and it seems inevitable to me that it would destroy investors’ faith in some British companies.

Hope

But despite all that gloom, I’m still bullish about shares in 2020. For one thing, the polls are putting the Conservatives significantly ahead of Labour, and the City seems largely unfazed, seeing an outright Labour victory as unlikely.

And even if Labour should win, the party’s plans appear massively over-ambitious in my personal opinion. The CBI has put the likely total cost of nationalisation at around £196bn (about 9% of the country’s annual economic output). And it would take time, especially with the resistance companies are likely to put up — and Labour would surely need multiple election wins to see it through.

I say just keep on buying shares.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019