HYP Utilities and Corbyn Risk

[Darka]

Rather than continue the conversation under the "United Utilities" thread I thought I'd start another one as my question is more general.

There is an obvious nationalisation threat to utilities (Gas, Electricity, Water, etc.) from a Corbyn/Labour government and I do feel this threat is very real; probably with as little compensation as possible to "punish" wealthy shareholders, even though a lot of those labour supporters are indirect shareholders through their pension plans, and probably don't even know they are going to be punishing themselves as well.

I do believe that they would implement the nationalisation as soon as possible after they were elected and that the share prices of such utility companies would be decimated; I'm frankly concerned about continuing to hold onto companies whose future seems to be in potential doubt.

I don't know how labour would deal with those companies who have international dealings, they might for example force them to split off their UK holdings into separate companies and nationalise those, or they could do something else but either way it won't be good.

I am in a quandary, either sell up or continue to hold - there is a chance of labour getting into Government next and I believe that strategic ignorance would be fool hardy under such circumstances.

I was wondering if any of you are making plans to mitigate the risk, as much as it can be mitigated?

regards,
Darka

[Alaric]

I don't know how labour would deal with those companies who have international dealings, they might for example force them to split off their UK holdings into separate companies and nationalise those, or they could do something else but either way it won't be good.

As you suggest, compulsory purchase below market prices would force share prices down. The thing is though, that a Corbyn government is going to be short of money and have to borrow. To the extent that they need the magic money tree of international investors, said money tree is going to become expensive to use, if the investors see assets being confiscated. But would that stop them, or would they just tax the "rich" in order to finance their plans?

[monabri]

The next general election is scheduled for May 2022. I can't see what will happen next week nevermind 5 years from now.

Plenty of time for SSE/NG to make bigger strides into other non UK markets ( tie ups with other utilities to muddy the waters).

[OLTB]

I side with monabri - it's very difficult to make a sell decision on what might happen in 5 years time. There are two utilities that may be affected in my HYP - SSE and UU. SSE seem to be making changes - I don't know what UU.'s plans are, but I'm sure they must be planning on potential future political changes.

Cheers, OLTB.

[moorfield]

I was wondering if any of you are making plans to mitigate the risk, as much as it can be mitigated?

From a HYP Practical board perspective, I am making plans to add a small top up of CNA in the new year, and then remain Strategically Ignorant as far as Utilities and Corbyn and are concerned.

Also, I plan not to vote for him.

[Darka]

Also, I plan not to vote for him.

That's probably the best advice, I could never vote for him.

Thanks everyone, I just couldn't decide between selling up or topping up and was having a bit of a "HYPanic" moment.

[Paultry]

I have been following the purchase price of CNA and NG. as top ups since they have entered bargain territory very recently.

Is this to do with the forth coming budget announcements, or just noise? Or is an election far closer than we think?

More importantly, are the dividends safe. CNA at 12p divi/162p SP is 7.4% NG. is 5.1%

Pyad and L'universal between them liked neither danger zone divis nor utilities.

But both are highly appealing to me, and I paid a lot more for them in the past.

Paul

[scrumpyjack]

I don’t hold any utilities, other than via trackers, as I think they are far too risky.

All Labour has to do is introduce tough price controls so the utilities become loss making and then the market price will collapse so they can be nationalised at ‘market price’ paid for in gilts.

I recall when Labour Nationalised the Shipbuilding and Aircraft industries in 1977 they didn’t much concern themselves with paying a ‘fair’ price.

One possibility would be to pay for the Utilities the same amount they were sold for on privatisation. They would think that fair and ignore inflation and everything else!

I really don’t think the market has cottoned on to what may well happen or remotely discounted the possibility in current share prices.

[monabri]

We should then add in Royal Mail and transport (rail and bus) into the mix. Oh, and British Telecom and BAE Systems and QQ ( defence of the realm). Where do we stop...Tesco, food distribution?

[idpickering]

I have been following the purchase price of CNA and NG. as top ups since they have entered bargain territory very recently.

Is this to do with the forth coming budget announcements, or just noise? Or is an election far closer than we think?

More importantly, are the dividends safe. CNA at 12p divi/162p SP is 7.4% NG. is 5.1%

Pyad and L'universal between them liked neither danger zone divis nor utilities.

But both are highly appealing to me, and I paid a lot more for them in the past.

Paul

Hi Paul, I'm not entirely sure as to why utility shares are cheaper currently, be it noise or politics. I do tend to view such things as coming under the Strategic Ignorance (SI.) umbrella, as I have no control over such things, apart from selling my utility holdings, which I am not going to do. Utilities of all ilks form about 11% in capital value terms of my 30 share HYP. I also rely on the overall diversification of my HYP to hopefully lessen the impact of a downwards trend in capital value of my HYP. The exposure to utilities I'm ok with, and is a risk I'm willing to take on.

Ian.

[Dod101]

Two comments here. I would not count on there being no general election before 2022. With the rudderless way that this government is operating, anything is possible, and if by some miracle May was to be replaced by someone with some political nouse we might find that they wanted to go to the poles earlier or might be forced to go earlier.

The other point is that the only way I can see to mitigate the undoubted political risk is to sell all utilities. The silver lining is that if this risk materialises, there would I imagine be a run on the pound and interest rates would need to rise which might help in investing whatever Corbyn would allow us capitalists by way of compensation (assuming he did not go for straight confiscation)

Dod

[Lootman]

We should then add in Royal Mail and transport (rail and bus) into the mix. Oh, and British Telecom and BAE Systems and QQ ( defence of the realm). Where do we stop...Tesco, food distribution?

McDonnell sad the other day that BT would not be renationalised, presumably because phones are no longer perceived as an utility in the way they were before mobile phones, smart phones, competition and so on. All that would achieve would be to make BT uncompetitive (or even more uncompetitive) and, given BT's pension woes, that would have other effects.

A fortiori, I think the same can be said for BAe, BP, BA and other formerly privatised entities.

Of course, Corbyn and McDonnell would be careful in an election campaign to not sound too scary. But their real desire would be to undo as much of the Thatcher revolution as they could, and they really cannot be trusted to keep their word. Moreover if the markets punished a new Labour government then they would blame "foreign speculators" and use that as a pretext to impose capital controls, windfall taxes, a Tobin tax and maybe even a wealth tax.

Then they will also raise corporate taxes and, perhaps, dividend taxes as well since, as we all know, only the lazy, tax-avoiding wealthy pay them anyway, amirite?

The rail renationalisation isn't such a problem because it's not so investable anyway. But I see utilities at risk and they are already highly regulated and leveraged. I sold my UU a few days ago - it was up 40% since my purchase plus I got a few year's worth of dividends. Good enough. I still hold NG and SVT, for now.

[Julian]

...
The other point is that the only way I can see to mitigate the undoubted political risk is to sell all utilities. The silver lining is that if this risk materialises, there would I imagine be a run on the pound and interest rates would need to rise which might help in investing whatever Corbyn would allow us capitalists by way of compensation (assuming he did not go for straight confiscation)

Dod

Another run on the pound, assuming it then stuck at a lower level, would also boost sterling income from any HYP holdings that declare in USD or EUR which might compensate partially for the loss of income that would likely come from investing whatever proceeds came from the sale of the utility shares into companies that would almost certainly be lower yielding.

I'm in the "don't know, too far away" camp. I'm definitely nervous about it because I think I have a pretty big slug of utilities in my HYP (as per my lazy/slapdash thread I don't actually know what weighting I have!) but I have no idea of what might happen (hopefully nothing) or when. Selling out of utilities now would likely have a quite significant negative effect on my absolute income so I'm watching and waiting with fingers crossed.

- Julian

[Jon277]

Funny I had been thinking of making a similar post to help clarify my thinking. I keep swinging between two opposing views

View 1
1. Can Labour actually win an election under Corbyn? there was some detailed analysis of the last election which showed that a lot of people voted Labour as a protest against Brexit because they didn't think he could win, he might not get those votes next time.
2. Traditionally the tory party have been good at elections but that last one was the worst one I have seen in my lifetime, can they possibly be that bad again?
3. There are huge majorities built into many seats now.
4. Are the Tory MPs really going to vote for an election before 2022?
5. Even if elected could they afford to nationalise not least because of the pensions issue and the signal it would send to the investment community
Under this scenario no need to sell

View 2

1. Tory party is torn apart by Brexit.
2. Brexit leads to major economic problem and then increase in social problem, plus brain drain
3. Public think what the hell and give Corbyn a try especially those that have been affected worse by austerity and those young enough not to remember the 1970s
4. McDonnell in particular is an ideologue and would do it regardless of economic impact.

Sell.

I don't know which of these is the more likely but I am leading towards view 1 at the moment,

Jon

[monabri]

Article in the DT today ( it's behind a firewall but you can get the drift from the visible text)

Article is a sell recommendation for Go Ahead Group GOG because of the political threat to transport ( rail).

http://www.telegraph.co.uk/investing/sh ... are-great/

[tjh290633]

Article in the DT today ( it's behind a firewall but you can get the drift from the visible text)

Article is a sell recommendation for Go Ahead Group GOG because of the political threat to transport ( rail).

http://www.telegraph.co.uk/investing/sh ... are-great/

Bearing in mind the traumas that GTR has had with conductors' strikes and the attempt to move to Driver only operation, and the risk of losing a franchise when re-tendering, one might conclude that the transport sector as a whole ought to be avoided. That includes airlines, bus and rail modes at least.

TJH

[TahiPanasDua]

I have been following the purchase price of CNA and NG. as top ups since they have entered bargain territory very recently.

Is this to do with the forth coming budget announcements, or just noise? Or is an election far closer than we think?

More importantly, are the dividends safe. CNA at 12p divi/162p SP is 7.4% NG. is 5.1%

Pyad and L'universal between them liked neither danger zone divis nor utilities.

But both are highly appealing to me, and I paid a lot more for them in the past.

Paul

Hi Paul, I'm not entirely sure as to why utility shares are cheaper currently, be it noise or politics. I do tend to view such things as coming under the Strategic Ignorance (SI.) umbrella, as I have no control over such things, apart from selling my utility holdings, which I am not going to do. Utilities of all ilks form about 11% in capital value terms of my 30 share HYP. I also rely on the overall diversification of my HYP to hopefully lessen the impact of a downwards trend in capital value of my HYP. The exposure to utilities I'm ok with, and is a risk I'm willing to take on.

Ian.

Ian,

I know you are a great advocate of strategic ignorance and It is surely a good strategy for most investors most of the time, including me. It does inevitably have it's limitations. Imagine for a moment that Labour has just won an election with a workable majority and has declared it's intention to nationalize certain utilities within x months. SI would be useless at that point and would not, as it happens, have served any of us well on this issue. Admittedly we are not there yet. It is, however, a serious possibility hence the worries of the OP, which I share.

There is no magic bullet that will tell us what to do.

What follows is not meant to be political point-scoring. As investors we need to take an impersonal view of such things.

Given the current cabinet chaos and vicious infighting and the possibility of the electorate becoming despondent as some of the downsides of Brexit move from the boringly theoretical to the concrete, I would not expect the present government to run it's full term.

Apologies for saying this again but the prices of utilities have fallen since Labour published it's nationalisation manifesto last November. This is surely no coincidence.

On the personal front, I have a whopping 16% of my portfolio in utilities and am contemplating reducing that to a maximum of 10% as a first step while I further contemplate the situation hoping for celestial guidance which I do know will never come. By the time I have completed my contemplations, utilities could have reached that 10% target without any input from me.

Nobody said it was easy.

TP2.

[ADrunkenMarcus]

Are people comfortable with including international shares in a HYP? If so, might there be any suitable replacement candidates in the sector?

Best wishes

Mark.

[idpickering]

I have been following the purchase price of CNA and NG. as top ups since they have entered bargain territory very recently.

Is this to do with the forth coming budget announcements, or just noise? Or is an election far closer than we think?

More importantly, are the dividends safe. CNA at 12p divi/162p SP is 7.4% NG. is 5.1%

Pyad and L'universal between them liked neither danger zone divis nor utilities.

But both are highly appealing to me, and I paid a lot more for them in the past.

Paul

Hi Paul, I'm not entirely sure as to why utility shares are cheaper currently, be it noise or politics. I do tend to view such things as coming under the Strategic Ignorance (SI.) umbrella, as I have no control over such things, apart from selling my utility holdings, which I am not going to do. Utilities of all ilks form about 11% in capital value terms of my 30 share HYP. I also rely on the overall diversification of my HYP to hopefully lessen the impact of a downwards trend in capital value of my HYP. The exposure to utilities I'm ok with, and is a risk I'm willing to take on.

Ian.

Ian,

I know you are a great advocate of strategic ignorance and It is surely a good strategy for most investors most of the time, including me. It does inevitably have it's limitations. Imagine for a moment that Labour has just won an election with a workable majority and has declared it's intention to nationalize certain utilities within x months. SI would be useless at that point and would not, as it happens, have served any of us well on this issue. Admittedly we are not there yet. It is, however, a serious possibility hence the worries of the OP, which I share.

There is no magic bullet that will tell us what to do.

What follows is not meant to be political point-scoring. As investors we need to take an impersonal view of such things.

Given the current cabinet chaos and vicious infighting and the possibility of the electorate becoming despondent as some of the downsides of Brexit move from the boringly theoretical to the concrete, I would not expect the present government to run it's full term.

Apologies for saying this again but the prices of utilities have fallen since Labour published it's nationalisation manifesto last November. This is surely no coincidence.

On the personal front, I have a whopping 16% of my portfolio in utilities and am contemplating reducing that to a maximum of 10% as a first step while I further contemplate the situation hoping for celestial guidance which I do know will never come. By the time I have completed my contemplations, utilities could have reached that 10% target without any input from me.

Nobody said it was easy.

TP2.

Hi TP2, cheers for your post. SI is all well and good I grant you, but if it was a 'known' known so to speak, that the labour party indicated for definite that they were going to carry out such an act, then I would respond accordingly at that time, ie sell. Until that is the case, for me SI applies.

Ian.

[Gengulphus]

I know you are a great advocate of strategic ignorance and It is surely a good strategy for most investors most of the time, including me. It does inevitably have it's limitations. Imagine for a moment that Labour has just won an election with a workable majority and has declared it's intention to nationalize certain utilities within x months. SI would be useless at that point ...

But so would anything else! The share prices of the utilities concerned would have plummeted to the point of only reflecting any compensation Labour had said they would pay plus a bit for whatever (probably forlorn) hopes there were that they wouldn't go through with their nationalisation plans because of a change of heart, being blocked in the courts or similar reasons. Neither SI nor anything else would save you from the resulting highly-likely losses.

And SI (or at least pyad's form of it) wouldn't apply anyway, because it says to ignore anyone's views (including one's own) on the long-term future, and views about a nationalisation that the government in power proposes to do in a matter of months are not about the long-term future! Basically, such a nationalisation is either something that might happen at some unknown time in the future, with SI being applicable (*), or it's something more definite and SI isn't applicable at all. It can switch from one to the other very rapidly, as e.g. it would have done in your scenario if the Labour victory had been a shock one with the opinion polls having predicted a Tory victory. But it can never be the mixture of being something more definite and SI being applicable, which is what it would need to be for there to be anything problematic about SI in your imagined scenario.

(*) Note that's merely saying that a HYPer might choose to apply SI to it - I'm not saying anything about whether they should apply it or not!

Gengulphus