Investment Director Andrew Mann analyses the possible effects of a new government on investors and the different sectors comprising the UK investment environment.
With the UK general election only a few weeks away, Labour’s lead in the opinion polls suggests the strong likelihood that we will soon have a new government, perhaps ushering in a new period of both political and economic stability.
Even though Labour governments have historically received a relatively tepid response from the stock market in their first few weeks of office, the current leadership under Keir Starmer appears to be much more centrist than we have experienced in recent times – and there is a good chance that markets will react positively. The more domestic-oriented FTSE 250 has tended to outperform the FTSE 100 around Labour party wins – so for all of its challenges, and there are certainly many of them, the UK market feels in a better position than it has been for a number of years.
It is normal of course that uncertainty over longer-term changes to tax, regulation and stronger employment rights will create some nervousness around the election outcome, with the possibility of higher wage costs for example remaining a drag on the retail and hospitality sectors in particular.
With UK interest rates seemingly staying higher for longer, the outlook should remain relatively unchanged for UK banks, with no indications of any tail risks when it comes to unexpected tax or policy changes.
From what we currently know, Labour has indicated there will be no immediate increase in either the rate of capital gains tax, or the top rate of income tax. Neither does the introduction of a wealth tax seem to be on the cards. This should be reassuring for the savings industry, and a simplification of the ISA system also seems likely, with a view to it becoming easier for retail investors to understand and participate in. One negative here though could be the reintroduction of the pension lifetime allowance, abolished by the Conservatives last year.
Housebuilders could come into sharp focus, with both parties focusing on boosting affordable homes and reforming the planning system. Labour have suggested cutting red tape to expedite the approval process for new build properties which might be good for those home builders geared towards the lower end of the market, but regardless of who wins, the housing market will undoubtedly remain a key talking point.
Housebuilders could come into sharp focus, with both parties focusing on boosting affordable homes and reforming the planning system.
For aerospace and defence, both parties look committed to strong levels of spending. As an island nation the nuclear submarine fleet remains an important focus. The current spending commitment to this seems unlikely to be reversed, despite the fact that a large number of the Labour leader’s team voted against Trident’s renewal in 2016. Whilst the Conservatives have committed to increase defence spending to 2.5% of GDP by 2030, it is possible that Labour will be more cautious, with Keir Starmer suggesting that spending will increase ‘as soon as resources allow’.
Elsewhere, a Labour victory will likely be seen as a negative for some businesses in the oil and gas sector. The Tories have already been surprisingly tough on taxation here and Labour have indicated that amongst other things, they intend to increase the Energy Profits Levy (a levy on the profits of companies producing oil or gas in the UK). That said, the likes of BP and Shell produce only a relatively small amount of oil and gas in UK waters, which should limit any effect.
It is not expected that either party will campaign for the nationalisation of utilities in this election and both are likely to support the UK’s Net Zero ambitions, with Labour’s plan possibly involving major investment into both wind farms and nuclear power. A wider decarbonisation of our electricity supply should be positive for a number of businesses, but one of Labour’s flagship policies is the creation of Great British Energy, which would be a new, publicly owned clean energy company. The idea would be to make the UK more cost-competitive through the introduction of state-funded competition. This could be negative for existing providers, but could also be used to provide funding towards the development of new technologies.
What seems likely is a continued pressure on water companies, with a focus on both their environmental performance and shareholder returns at a time when the regulator is being tasked with setting bills for 2025-2030. Investors might therefore need to be mindful of a possible reduction to dividend payouts as a result.
We will continue to monitor events closely throughout the election, and then review the potential implications of any policies that are implemented post-election by the successful party.
