Morgan Stanley Says Politics Can Upstage Brexit for U.K. Stocks

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equity investors preoccupied by Brexit should turn some of their attention to the country’s politics.
That’s the message from Morgan Stanley, which thinks an early U.
general election in the second half of 2018 is likely.
Politics is coming to the forefront for fund managers as pressure mounts on Prime Minister Theresa May after she failed to convince European leaders last month to move talks from the divorce to trade.
The implications of a Labour government for U.
equities could be significant, particularly under the party’s current leadership, according to Graham Secker, an equity strategist at Morgan Stanley.
Companies in the utilities, postal services, telecommunications, financials and defense sectors would be among the most sensitive in such a scenario.
“If I am a U.
equities fund manager, I am more concerned about a potential change in the domestic political government than I am about Brexit,” Secker said at a briefing Monday.
“You need to think about tax rates going up, about nationalization, about an economic system which has favored capital over labor for last 10 to 20 years shifting to favor labor over capital.
” A Morgan Stanley screen of firms that could be most negatively affected by potential changes to employment legislation under a Labour government includes companies with high domestic exposure, low margins and a large number of employees.
It contains Ocado Group Plc, Go-Ahead Group Plc, Stagecoach Group Plc, Greene King Plc, Tesco Plc, Ladbrokes Coral Group Plc and Dixons Carphone Plc.
domestic companies are already suffering under the weight of a slowing economy and a fragile government -- the FTSE Local U.
Index has underperformed both European midcaps and U.
megacaps this year.
Members of the local gauge rely on the domestic market for 70 percent or more of sales, while their FTSE 100 peers get roughly three-quarters of revenue abroad.
Given the U.
is facing uncertainty over both its domestic politics and the Brexit process, it’s unlikely that any relief bounce in U.
assets will be long-lasting if negotiations with the European Union move to the next stage, Morgan Stanley says.
A Bank of America Merrill Lynch fund manager survey this month showed the level of pessimism among global fund managers for U.
equities is at levels last seen during the 2008 financial crisis.
“Against this backdrop, even if we see good progress in the Brexit negotiations, the scope for U.
sensitive assets to rally may be muted,” according to Secker.

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