Stocks that could benefit from Labour’s election plans

After the election, investors may hope for the best but fear the worst.

For example, the new government has indicated that it may force British pension funds to significantly increase their holdings of British stocks, a strategy that would breathe new life into British markets.

Yet memories linger of the huge blow to our pensions that came with the abolition of dividend tax relief during Tony Blair’s first term at Number 10.

The uncertainty is nerve-wracking, compounded by fears that Labour will succumb to the temptation to return to its old tax-and-spend ways. But for now, stock market professionals seem happy to exploit the conditions created by the government’s current ‘don’t scare the horses’ attitude.

Are you ready to take a gamble and are you prepared for unpleasant surprises? Here is how to take advantage of the opportunities of this new climate.

THE BACKGROUND

There is talk in some quarters of a mountain of money flooding UK markets and pushing up share prices.

Bank of America’s latest survey of fund managers shows there is a lot of enthusiasm for UK shares.

Experts are closely watching the rhetoric from Labour’s left wing, as they know this faction could rebel and demand more spending.

David Coombs of asset manager Rathbones said: ‘For the first 12 months or so, the government is likely to be sensible, even a bit grey – and markets like a bit of grey.

‘In addition, the possibility of greater contact with the EU on regulation and trade could lead to people who manage money abroad seeing value in Britain and supporting the FTSE 100.’

However, he warns that after about 18 months it will become harder for the government to meet its spending commitments.

Anyone who is suspicious of Labour’s ability to be responsible over any given time frame should note that the state of the economy limits its room for manoeuvre. Frederique Carrier of RBC Wealth Management says: ‘The new government is likely to find its policies constrained by the weak national finances – with a budget deficit of more than 4 per cent of GDP and public debt just over 100 per cent.’

Moreover, the Labour government will worry that the spending and tax rises could lead to “a Liz Truss moment”, as Rupert Thompson, chief economist at asset manager IBOSS, puts it.

THE ACTION PLAN

Carrier argues there are reasons to be cheerful about UK stock markets.

‘RBC says the low valuation of UK equities means takeover interest from international rivals – and private equity – is likely to remain high.’ But the outlook for different sectors varies. The ambition to deliver 1.5 million homes in this parliamentary term is good news for housebuilders.

RBC Capital Markets expects Taylor Wimpey, with its large project land bank, and social housing specialist Vistry to be the biggest beneficiaries.

Defence companies such as BAE, Babcock, Chemring, Qinetiq and Rolls-Royce are also optimistic. Charles Stanley’s Garry White highlights Labour’s commitment to the Trident nuclear deterrent and its pledge to increase defence spending to 2.5 per cent of GDP ‘as soon as resources allow’.

He notes: ‘The sector is in excellent health, and a change of government is unlikely to change that.’

Saxo Bank’s Peter Garnry is also optimistic, as ‘the defence industry is already experiencing a strong tailwind from the war in Ukraine and European rearmament’.

The outlook for oil and gas is less rosy due to policy measures such as the plan to increase the levy on UK producers’ profits from 75 percent to 78 percent by 2029.

The two energy giants, BP and Shell, could take some of the extra tax on their shoulders. But the threat has prompted Jersey Oil & Gas, Neo Energy and Serica Energy to postpone investments.

However, Labour could soften the proposal, saying it could lead to more oil and gas exports from Iran and Russia – and the loss of around 100,000 jobs.

There must also be doubts about the wisdom of leaving the North Sea when there is so little clarity about the mission to make Britain ‘a clean energy superpower by 2030’. The Greencoat UK Wind investment trust is my bet on the gains that could come from this transition. But the trust’s share price is trading at a 17 per cent discount to net asset value, underlining that it is a bargain only for the patient.

The Labour Party’s policy statements on the water sector are more explicit: employers can be prosecuted for illegally discharging sewage.

Shares in Pennon, Severn Trent and United Utilities have been given a ‘hold’ rating, presumably because such sanctions would force a clean-up of the sector.

There is no guarantee of progress in this area, or any other measures. But there is the certainty of excitement and thrills. To spread your bets, you can always hop on board for a ride on an index fund such as Fidelity Index UK Fund, which is Interactive Investor’s top tip.