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Building the future: Keir Starmer and Chancellor Rachel Reeves
After the election, investors may be hoping for the best, but fearing the worst.
For example, the new government has hinted that it could force UK pension funds to massively increase their holdings of British shares, a strategy that would revive the country’s markets.
However, memories of the massive blow to our pensions that the abolition of the dividend tax credit during Tony Blair’s first term in Number 10 dealt us are still lingering.
The uncertainty is disconcerting and is heightened by fears that Labour will succumb to the temptation of returning to its old tax-and-spend ways. But for now, stock market professionals seem happy to take advantage of the conditions created by the government’s current “don’t spook the horses” stance.
If you’re ready to take a risk and prepared for unpleasant surprises, here’s how to take advantage of the opportunities of this new climate.
THE BOTTOM
There is talk in some quarters that a wall of money is pouring into UK markets, pushing up share prices.
Bank of America’s latest fund manager survey reveals considerable enthusiasm for British stocks.
But pundits will be keeping a close eye on the rhetoric of Labour’s left wing, aware that this faction could rebel and demand more spending.
David Coombs of wealth manager Rathbones said: ‘For the first 12 months or so the government is likely to be sensible, a bit grey even, and markets tend to like a bit of grey.
‘In addition, the prospect of greater engagement with the EU on regulation and trade could entice people managing money overseas to see value in Britain and support the FTSE 100.’
He warns, however, that after about 18 months, the government will find it more difficult to meet its spending commitments.
Anyone with doubts about Labour’s ability to take responsibility over any period of time should note that the state of the economy limits its room for manoeuvre. Frederique Carrier of RBC Wealth Management says: “The new government will likely find its policies constrained by weak national finances, with the fiscal deficit exceeding 4% of GDP and government debt just above 100%.”
And, as Rupert Thompson, chief economist at asset manager IBOSS, points out, a Labour government will be concerned that spending and tax rises could produce “a Liz Truss moment”.
THE ACTION PLAN
There are reasons to be optimistic about UK stock markets, says Carrier.
“In RBC’s view, the low valuation of UK stocks means that takeover interest from international competitors – and private equity – is likely to remain high.” But the outlook for individual sectors varies. The ambition to deliver 1.5 million homes this term is good news for housebuilders.
RBC Capital Markets estimates the biggest beneficiaries will be Taylor Wimpey, with its large bank of project land, and social housing specialist Vistry.
Optimism also surrounds defence stocks such as BAE, Babcock, Chemring, Qinetiq and Rolls-Royce. Charles Stanley’s Garry White highlights Labour’s commitment to the Trident nuclear deterrent and a pledge to increase defence spending to 2.5 per cent of GDP “as soon as resources allow”.
He comments: “The sector is in very good health and a change of government is unlikely to change this situation.”
Saxo Bank’s Peter Garnry is similarly optimistic, as “the defence industry is already experiencing a lot of tailwinds from the war in Ukraine and the rearmament of Europe.”
The outlook for oil and gas is dimmer thanks to policies such as a plan to raise UK producers’ profits tax from 75 per cent to 78 per cent by 2029.
The two energy giants, BP and Shell, can afford to pay some of the extra taxes, but the threat has caused Jersey Oil & Gas, Neo Energy and Serica Energy to delay their investments.
However, Labour may water down the proposal as it could mean 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 abandoning the North Sea, while there is so little clarity about the mission to make Britain “a clean energy superpower by 2030”. The Greencoat UK Wind investment fund is my bet on the profits that could flow from this transition. But the fund’s share price is at a 17 per cent discount to its net asset value, underlining that it is a bargain only for the patient.
The Labour Party’s policy statement on the water industry is more explicit: businesses could face criminal charges for illegal dumping of wastewater.
Shares in Pennon, Severn Trent and United Utilities have a hold rating, probably on the basis that the sanctions will force a clean-up of the sector.
There is no certainty that progress will be made on this or any other measure, but there will be strong emotions and losses. To diversify your bets, you can always jump on board an index fund such as Fidelity Index UK Fund, which is Interactive Investor’s top recommendation.
Money for the elections
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