In the run-up to the December 12 general election, the Labour party’s latest manifesto is exactly where we’d expect it to be in regards to utilities. It wants to nationalise them, of course, a point it has been making for a while. Understandably, this caused fresh investor panic as obvious from a dip in FTSE 100 utilities’ share prices. Electricity provider National Grid fared best with only a 0.6% decline at yesterday’s close from the day before, while water and sewerage services providers Severn Trent and United Utilities showed far bigger falls of 1.9% and 2.2% respectively.
When the Labour party first talked of nationalisation, the election was some way off and at least to me it seemed like a distant possibility. But with the election upon us now, I think it’s a good idea to look to how much closer we are to the nationalisation idea becoming a reality.
A Labour government?
The first question that comes to my mind is whether Labour is likely to form a government at all. According to news reports, it appears that it isn’t likely to form a majority government but the Tories don’t seem to be much ahead of it either. In the case of a hung parliament, however, Labour might be able to form a coalition along with smaller opposition parties.
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Obstacle run
If we assume for a minute that this last scenario does in fact occur, what does that mean for utilities? For re-nationalisation to take place, it has to first go through Parliament. It would easier to move forward with a Labour majority, but I’m not sure how it will play out when the support of other parties is needed. The point I’m really trying to make here is this – nationalisation of big utilities with multiple stakeholder interests isn’t going to be a walk in the park.
Accounting for nationalisation
Even if it does get the necessary go-ahead, investors will have to be adequately compensated. Labour has also mentioned that it will look to convert shares to bonds, and why’s that bad? As long as investors’ value of capital is protected in the conversion process, all of it might just turn out to be ok.
The challenge, in my view, is in the near term, if the scenario of a Labour-led coalition government does play out. It will most likely plunge utility shares into uncertainty. Yet I believe that for investors who are playing the long game, the next couple of weeks actually offer opportunity to buy into these shares and hold on to these otherwise quality stocks. Of all the utilities, I’m most inclined towards National Grid, which is better hedged than others because of its international presence, as pointed out by my Foolish colleague G A Chester when Labour first talked of nationalisation. I’ll be watching its share price movements closely.
