Can Corbyn win, and what if he does?

[The following is NOT a forecast – according to some bookies, Corbyn has only a 14% chance of being the next Prime Minister. What follows is an unlikely potential scenario which would have a high impact on markets – a so-called Black Swan event]

Black Swan: An outlier event, with an extreme impact

Before the discovery of Australia, people in the old world were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence. The significance of the story lies in the fact that it illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single (and, I am told, quite ugly) black bird [1].

Corbyn gained nearly 60% of the vote in a contest in which he was pitted against far more “experienced” politicians, despite only getting on the ballot paper at all by “borrowing” some MPs nominations for the role

In a bland, safety first and marketing-speak dominated contest, he stood out. According to some observers he won because he was the anti-establishment candidate, appealing to many precisely because he was not the archetypal Oxford University to SPAD (government special advisers) to safe seat professional politician (“The Thick of It” TV show typifies this process). Anti-politics appears to work in Europe (Syriza, Pademos), and is prospering in the US too, judging by the rise of Donald Trump and Bernie Sanders.

This cynicism towards politicians (of all hues) can be seen across Europe in the form of votes for UKIP, Front National, Syriza, Pademos, the SNP, and the current popularity of aforementioned Sanders (on the left) and Trump (from the right) in the US. All these actors are different from each other but they all symbolise an alienation from the mainstream political establishment on the part of voters. Hilary Clinton’s fall from grace in the polls appears to be largely a result of the deep distrust felt towards her as part of the political establishment (not to mention her carelessness with emails).

As the Crooked Timber website puts it, “The deep forces driving these changes are globalisation, the end of growth and rising living-standards for ordinary people in Western democracies, the effect of the internet on people’s expectation of work, increasing inequality and subversion of democracy by the wealthy”. The perception that the “game” is rigged in favour of the elite is widespread, as suggested by the complete failure to prosecute ANY bankers responsible for the 2007-09 financial crisis.

The consequence of this is a vicious circle, in which political elites, according to Peter Mair in his book [2] are “protected from the people and from excessive input”, and they come to identify more and more with each other, and less and less with voters, who in turn become more and more apathetic and cynical about politicians’ motives. This article in the New Yorker magazine neatly illustrates the chasm in perceptions between politicians and the public.

Corbyn’s victory also illustrates the reality that “events, dear boy” [3] conspire to frustrate those “experts” who believe that they can control complex processes (such as elections).

Having been caught off guard, the mainstream media, (and the political class), have written him off as “unelectable”. They also wrote off Nigel Farage (and UKIP) but it made no difference to the electorate, 4 million of whom voted for him. Before that, Barrack Obama was also dismissed as an outsider, despite his ability to galvanise the youth vote, [4] which was a major factor in his success. The youth do not vote (according to conventional wisdom), so the media and the political class don’t enquire as to their opinion (or just ignore them). But voters are clearly feeling insecure, as globalisation changes their world in ways they don’t understand, (and don’t like). Some are starting to ask if the outsider could actually win…

What is certain is that the media and the elites will coalesce to try to destroy Corbyn’s “credibility” – large amounts of money and time will be spent in undermining him in an attempt to render him ineffective. Expect to hear more about financial firms threatening to leave the UK if he is elected, just as happened in the Scottish Referendum campaign. But if he can avoid the obvious traps (which he has already failed to do, for example in the Battle of Britain Commemoration controversy) he could build a following, particularly among the young (who of course don’t remember the chaos of the1970’s) and really frighten the establishment.

Markets are currently not factoring in a Corbyn victory, but of course, by the time that his victory is deemed likely, prices will already fallen sharply. Relative UK stock market under performance (vis-à-vis Europe and the US) will be a good indicator of the tide turning in his favour, but the most likely channel by which the effect will be felt is in the currency markets – a Sterling crisis cannot be dismissed if foreign investors take flight.

Firstly, remember that this is STILL an unlikely scenario. The next election is 4-5 years away, and there is no need for immediate panic. But this does highlight something we have been highlighting on our Repository [available to members only], namely the merits of more Globally orientated Portfolios, rather than having a heavy “Home Bias“, (in this case, to the UK).

The situation is more pronounced in the Active Management space. To take some examples at random, the L&G Global Equity (70:30) Index fund has 64% of its assets in UK Equity. A December 2014 study on UK Local Authority pension schemes showed a 63% equity weighting as of 2014, with the majority still focussed domestically.The St James’ Place UK and International Income fund has 81% of its assets in the UK, whilst its Equity Income fund is also 81% UK invested. This is beginning to change, however; this process itself may well act as a drag on the UK markets unless foreigners commensurately increase their UK holdings, which seems unlikely.

There is no all encompassing solution to this problem. All one can do is to sit tight, remain as diversified as possible and not obsess too much over an event that may, (but probably won’t), happen. Trying to time market movements is hard enough – trying to predict price movements on the basis of politics, is a hopeless task, one that will defeat us all in the end.

In the week when the great sage Yogi Berra died, we’ll leave the last word to him:

“The future ain’t what it used to be”