Political risk has re-emerged in the UK for the first time in 20 years. It may take investors a little while for their mindsets to adjust.
First, shares in power companies Centrica and SSE were knocked for six — well, actually seven per cent — when Labour leader Ed Miliband announced that, if elected in 2015, he will immediately freeze energy prices as a prelude to restructuring the way the energy market works.
Then at the weekend he told BBC Radio 5 that he was prepared to fix prices in other sectors, “making markets work in the public interest”. He singled out banking and the railways.
Firing line
Bank shares didn’t move on the news, but it has subtly shifted them into the firing line of a future Labour government. Unpopular as ever, banks are an easy target: even Margaret Thatcher levied a windfall tax on them in 1981.
That’s a factor that could weigh on the high-street banks — and especially state-owned RBS and Lloyds — in the run-up to the next General Election, just 19 months away. UK Banks are benefitting from a recovering economy and buoyant housing market, but if a Labour victory starts to look likely, political risk could impact on their shares — and on Lloyds’ privatisation.
Attractions
That would increase the relative attractions of HSBC (LSE: HSBA) (NYSE: HBC.US) and Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US), which are less dependent on the UK. In the last six months, just 15% of HSBC’s profits came from the UK and only 7% of Standard Chartered’s operating income was generated here.
The global reach of both banks diversifies their economic and political risk, and gives them a flexibility the mainstream UK banks don’t have. In the past, both have made noises about moving their headquarters abroad.
With a third of risk weighted assets in Asia Pacific, a quarter in Europe and a quarter in North America, HSBC’s risk assets are certainly diversified. Its global reach makes it the bank of choice for multinationals. But its earnings are more concentrated: two-thirds of profits come from Asia Pacific, and a third of profits from Hong Kong alone.
Standard Chartered isn’t quite so Asia Pacific-centric, with just over half operating profits coming from the region. India and Africa make a bigger relative contribution, with the bank targeting a doubling of income from Africa over the next four years.
