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(Bloomberg) — Homebuilders, energy companies and a 500-year-old postal firm are among the stocks most exposed to the outcome of Britain’s July 4 election as the opposition Labour Party prepares to take power.
Frustrated with the UK’s sluggish growth, mounting debt and government scandals, investors are broadly positive about the widely anticipated change in government. That’s despite Labour lacking policies that differ particularly from those of the Conservatives, or the kind of fiscal firepower that might deliver a significant boost to the economy.
Still, some kind of spending uptick is seen as likely — and would lift domestically focused companies, strategists say. There’s the chance of better ties with the European Union after years of damage since Brexit. And Labour leader Keir Starmer’s centrist agenda promises to avoid surprise tax hikes.
“The upcoming election, provided the outcome is as expected, could prove a clearing event for UK equities, and in particular, those which are more focused on the home market,” said Laura Foll, a portfolio manager at Janus Henderson.
After fleeing British stocks in droves in the wake of the 2016 vote to exit the EU, investors are turning more positive. Fund managers ranked the UK among their preferred European markets in Bank of America Corp.’s latest monthly poll, having named it most disliked as recently as October.
Funds investing in UK midcap firms, which are usually more exposed to the local economy, have had back-to-back net monthly inflows for the first time in three years, according to Morningstar Direct.
“Labour will be very careful not to swing the bat too much in terms of radical policy surrounding businesses, as they will want to prove that they can manage the economy,” said Haig Bathgate, head of investments at UK wealth manager Atomos. Meanwhile, “their stated aim of thawing relations with Europe could actually be quite a big positive for the stock market and general sentiment,” he said.
Here are the sectors and stocks to keep an eye on:
Property
Homebuilders could win big. Labour have vowed to reinstate mandatory housing targets and ease planning restrictions as they eye 1.5 million new homes over a five-year period. The Conservatives have announced a similar target, but aim to get it done via tax cuts, including scrapping stamp duty for first-time buyers on homes worth less than £425,000 ($537,770).
Anthony Codling, an analyst at RBC Capital Europe, is bullish on Labour’s strategy.
“We suspect that the value of UK housebuilder shares is more likely to re-rate in an environment where more homes are built rather than taxes lowered,” he wrote in a note. He expects Vistry Group Plc, which focuses on affordable housing, and MJ Gleeson Plc, which majors on partnership housing, to benefit the most.
A Labour win that brings in a stable government would also support commercial real estate, according to Bernstein analyst Ben Richford, who predicts British Land Co. Plc and Workspace Group Plc will outperform. Valuations on the portfolios of London-focused real estate investment trusts have already bottomed, he says.
Energy and Utilities
Shares in North Sea oil companies fell after Labour announced plans for a £1.2 billion windfall tax on the sector and ruled out issuing new oil licenses. Serica Energy Plc and Enquest Plc were most impacted.
As for utilities, Labour and the Conservatives are both broadly supportive of net-zero ambitions and the decarbonization of the electricity grid. While some in the industry are alarmed by Labour’s plan for a publicly-owned firm called Great British Energy that will lead the development of clean technologies, they say its eventual market impact remains uncertain.
Investors should use any election-related weakness to add exposure to utilities SSE Plc, Centrica Plc and Drax Group Plc, strategists at JPMorgan Chase & Co. advise.
There’s been intense focus on water companies amid rising bills, sewage spills, and debt problems at Thames Water Ltd. The sector faces “increasing political risk,” Citigroup Inc. analyst Jenny Ping warned, adding that some Labour MPs have urged special measures, including dividend restrictions. Watch United Utilities Group Plc and Severn Trent Plc.
Royal Mail
Labour used its manifesto launch on June 13 to pledge robust scrutiny of Czech billionaire Daniel Kretinsky’s takeover proposal for Royal Mail-owner International Distribution Services Plc.
“This is not outright opposition to the proposed takeover, and it could be interpreted as opening the door to clearance,” said Liberum analyst Gerald Khoo, who previously said he saw “no chance” a Labour government would permit the deal.
Many analysts still believe that whoever wins the vote will block Kretinsky’s £3.6 billion bid, given Royal Mail’s vital role and its iconic status, with roots dating back five centuries. IDS shares reflect that, having fallen more than 4% since the manifesto release to around 317 pence, well below Kretinsky’s 370 pence-per-share offer.
Banks
The Labour Party pledged to review plans to cut the government’s stake in NatWest Group Plc further if it wins the election. While the current government has been steadily reducing its ownership, the Treasury remains NatWest’s biggest shareholder after the £46 billion ($59 billion) bailout of what was then Royal Bank of Scotland during the 2008 financial crisis.
Meanwhile, bank shareholders are concerned that any incoming government will change how the Bank of England pays interest to lenders. The four top banks — NatWest, Lloyds Banking Group Plc, Barclays Plc and Santander UK — earned £9.23 billion from interest payments last year and Bloomberg Intelligence estimates that moving to a tiered system of payments could cost the lenders about £1.5 billion.
On June 12, Shadow Chancellor Rachel Reeves ruled out such a move, sending bank shares higher. Yet with authorities desperate for fiscal headroom, the idea could be resurrected.
Deutsche Bank AG analyst Jonathan Pierce said there could also be a compelling “moral argument” for a change. “Why should the BOE pay base rate in full on commercial bank deposits when the commercial banks have only passed on 45% of those rate hikes to their own customers?”
Outsourcing
UK outsourcing solutions company Serco Group Plc “is typically seen as a loser under Labour,” say JPMorgan analysts. That’s because the party is viewed as less likely to opt for incremental outsourcing of public services to the private sector, and could even roll back some existing outsourcing arrangements.
Still, JPMorgan doesn’t consider it a material risk, because Starmer’s government “is likely to tend towards the center.”
Gambling
The election has raised uncertainty around when policies outlined in the Gambling Act white paper might be rolled out, affecting measures such as affordability checks, online games design and age verification.
Bingo hall operator Rank Group Plc, which owns Grosvenor Casinos, slumped as much as 12% the day after the election was announced on worries about a delay to land-based reform. Flutter Entertainment Plc and Entain Plc, with more overseas revenue, could prove more resilient.
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