Jeremy Corbyn becoming prime minister would be worse for British business than Brexit, a Wall Street investment bank has warned.
The Labour Party winning power could usher in “the most significant political shift in the UK since the end of the 1970s”, when Margaret Thatcher took the keys to Downing Street, analysts at Morgan Stanley said.
The nationalisation of industries, higher taxes on corporations and more spending on low-income households and the public sector could damage the value of UK companies, the bank said.
In this context, “domestic politics may be perceived as a bigger risk than Brexit,” Morgan Stanley’s European equity team wrote in a report sent to clients on Monday.
Mr Corbyn could become prime minister towards the end of next year once it becomes apparent that Theresa May’s government cannot deliver the Brexit deal they had hoped for, Morgan Stanley suggested.
“The UK is in the midst of a double whammy of uncertainty in the shape of Brexit and a fragile domestic political situation,” the report read.
“Taken together, these two factors – which are interrelated to some degree – cast a long shadow over the policy backdrop and economic outlook of the UK.”
Upmarket supermarket Ocado and pub chain Wetherspoons – which was founded by vocal Brexit critic Tim Martin – would be among the firms most negatively affected by a Labour government under Mr Corbyn, the bank said.
Its analysis said that bookmakers, outsourcing firms like Serco, and all other companies with low margins and lots of staff could take a hit from Labour’s potential changes to employment laws.
The report added: “From a UK investor perspective, we believe that the domestic political situation is at least as significant as Brexit, given the fragile state of the current Government and the perceived risks of an incoming Labour administration that could potentially embark on a radical change in policy direction.
“Against this backdrop, even if we see good progress in the Brexit negotiations, the scope for UK sensitive assets to rally may be muted, unless we also see an improvement in the Government’s position in opinion polls.”
The value of the FTSE 100 index of leading shares has soared since Brexit, helped by the dramatic fall in the value of the pound, which has helped juice the profits of global firms earning revenues abroad. Meanwhile, austerity has continued to bite for workers and those reliant on benefits, with both groups seeing their average real incomes fall in recent months.
A broad consensus of economists have said that Brexit will hurt the UK economy. The OECD said on Tuesday that it expects Brexit to result in a sharp slowdown in UK growth.
In its November forecast, the Paris-based multilateral think tank projects UK GDP growth this year of 1.5 per cent, slowing to 1.2 per cent in 2018. In 2019, when the UK is set to leave the EU, the OECD expects growth of just 1.1 per cent.
“The growth slowdown is expected to continue through 2018, due to continuing uncertainty over the outcome of negotiations around the decision to leave the European Union and the impact of higher inflation on household purchasing power,” it said.