The local elections on May 3rd may prove to be unusually exciting, both from a political and market perspective.
Jeremy Corbyn launched Labour’s campaign today and made clear his ambition is to seize flagship Conservative boroughs in London, including Kensington & Chelsea, Westminster, Wandsworth and Barnett.
I highlighted this risk in a piece for the CapX website in early January. On the face of it, Labour are well placed effectively to gain total dominance of London following the party’s dramatic performance in the capital city in last year’s General Election. Labour already holds 20 of London’s 32 boroughs, compared to the Conservatives’ eight.
In Battersea, where I live, we got a taster last summer when the amiable Conservative MP Jane Ellison was ousted by a Corbynite firebrand called Marsha De Cordova.
There are a host of reasons for the Labour London surge: stamp duty, Brexit, people tiring of austerity, housing, Grenfell and Theresa May’s comments about the “citizens of nowhere” who live in the metropolis. We can now add to this the surge in knife crime, which despite London Mayor Sadiq Khan’s inadequacies, is being pinned on the Conservatives due to police cuts and Theresa May’s opposition to stop and search by the police.
Only around 35% of the electorate typically manages to summon the enthusiasm to vote in local elections, but there are reasons to think this time could be more interesting.
Investor sentiment and a New Centre Party
Political risk is currently a major influence on investor decisions. Just look at South Africa, where the removal of Jacob Zuma as President in February has since contributed to a five per cent rally in the rand.
The latest survey by Bank of America Merrill Lynch of global fund managers found that a record net 42% were underweight UK equities, mainly because of the related political risks of Brexit and Mr Corbyn’s socialist policies.
Whatever the outcome in May, the local elections bring forward the possibility of a Labour split and the creation of a so-called New Centre Party. Such a split, dividing the left and centre-left vote, would theoretically make a pure Corbyn Government much less likely and, ergo, potentially lead to a rally in the pound and UK equities.
This was trailed in the Observer at the weekend with a peculiar story claiming that a former Labour donor had pledged £50m to create such an entity. You need to understand how politicians think. Political parties don’t split during elections – it is far too complicated – but they can do so afterwards as the success and blame is shared around.
Markets rally in two out of three scenarios
There are three scenarios we can imagine.
First, if Corbyn does well and achieves his objectives of seizing flagship Tory London boroughs, it will arguably enhance his control over the Labour party and further weaken Mrs May. In which case, one can see investors turning even more negative on the UK.
Second, Corbyn does well, but this actually puts the fear into Blairite Labour MPs who these days largely represent provincial seats in the Midlands and the North, like Yvette Cooper (Normanton Pontefract and Castleford) or Dan Jarvis (Barnsley).
They see Corbynism as a London phenomenon and feel so politically tortured by his leadership that a triumph by him in London could finally alienate them. It is hard to estimate how much they loathe Mr Corbyn and all his policies and people. Some of them could finally go their own way.
Third, Corbyn does worse than expected. Given the elevated expectations, this is now a possibility. There is a hint of hubris to Labour’s approach to London and the row about anti-semitism in the party could well act as a deterrent to many of the small ‘l’ liberal voters the party attracted at the general election. To this misstep we must now add his apparent willingness to indulge not only President Putin of Russia but President Assad of Syria.
In recent weeks, according to YouGov, Mr Corbyn’s personal approval rating has plunged to a net minus 25% from plus 8% in December.
Corbyn hubris and Barnett
Of the roughly 270,000 Jewish people who live in the UK, about 160,000 live in London. According to the Board of Deputies, about one in five, or 54,000, live in Barnett alone. It would be a very peculiar thing if Barnett voted for a Labour council as Mr Corbyn seems to hope. Speaking for myself, I will vote for an open and tolerant society every time and so, I trust, will my neighbours.
In this scenario, where Corbyn surprisingly blows it in London, Blairites could feel emboldened to split. Again, UK assets could rally on the basis that the threat of a Corbyn government is receding.
Finally, we should not assume that Theresa May’s position is secure. Her Majority in Parliament is waifer thin. This explains the Government’s tortoise like approach to everything except managing Brexit. We cannot forecast, we can only debate surprises.