Shares that can profit from Labour’s election plans

In the aftermath of the election, investors may be hoping for the best, but fearing the worst.

For example, the new Government has intimated that it may compel UK pension funds to massively boost their holdings of British shares, a strategy that would reinvigorate UK markets.

Yet the memory lingers of the huge blow to our pensions from the abolition of the dividend tax credit during Tony Blair’s first term at Number 10.

The uncertainty is unnerving, heightened by fear 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’ stance.

If you are ready for a gamble and prepared for nasty surprises, here’s how to exploit the opportunities of this new climate.

The background

In some quarters, there is talk of a wall of money hitting the UK markets, driving up the share prices.

The latest Bank of America’s fund manager survey reveals considerable enthusiasm for British stocks.

But the experts will be monitoring the rhetoric from Labour’s Left-wing, aware this faction could rebel and demand more spending.

David Coombs, of wealth manager Rathbones, says: ‘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.

‘Also the possibility of more contact with the EU on regulation and trade could draw the people who manage money overseas to see value in Britain and back the FTSE 100.’

He warns, however, that after about 18 months, the Government will find it harder to stick to their spending commitments.

Anyone suspicious about Labour’s capacity to be responsible over any time frame should note that the state of the economy limits the scope for manoeuvre.

Frederique Carrier, of RBC Wealth Management, says: ‘The new Government will likely find that its policies will be restricted by the weak national finances – with the fiscal deficit exceeding 4 per cent of GDP and government debt just above 100 per cent.’

Also, as Rupert Thompson, chief economist at asset manager IBOSS points out, the Labour government will be concerned that spending and tax hikes could produce ‘a Liz Truss moment’.

The action plan

There are reasons to be cheerful about UK stock markets, as Carrier argues.

‘In RBC’s view, the low valuation of UK equities means that takeover interest from international competitors – and private equity – is likely to remain elevated.’ But the outlook for different sector varies. 

The ambition to deliver 1.5million homes over this parliament is good news for housebuilders.

RBC Capital Markets reckons the chief beneficiaries will be Taylor Wimpey, with its large land bank of projects and the social housing specialist Vistry.

Optimism also surrounds defence stocks like BAE, Babcock, Chemring, Qinetiq and Rolls-Royce. 

Garry White of Charles Stanley highlights Labour’s commitment to the Trident nuclear deterrent and the promise to raise defence spending to 2.5 per cent of GDP ‘as soon as resources will allow’.

Upbeat: Optimism surrounds defence stocks like BAE, Babcock, Chemring, Qinetiq and Rolls-Royce

He comments: ‘The sector is in rude health – and a change of government is unlikely to change this.’

Peter Garnry of Saxo Bank is similarly sanguine since ‘the defence industry is already experiencing a lot of tailwinds from the war in Ukraine and Europe’s rearming’.

The prospects for oil and gas are less bright thanks to policies such as the plan to raise the levy on UK producers’ profits from 75 per cent to 78 per cent until 2029.

The two energy giants, BP and Shell, can shoulder some extra taxation. But the threat has caused Jersey Oil & Gas, Neo Energy and Serica Energy to delay investment.

However, Labour may soften the proposal, as it could mean in more oil and gas exports from Iran and Russia – and cause about 100,000 job losses.

Also there must be doubt over the wisdom of abandoning the North Sea, while there is so little clarity over mission to make Britain ‘a clean energy superpower by 2030’.

The Greencoat UK Wind investment trust is my bet on the profit that could flow from this transition. But the trust’s share price stands 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’s on the water industry are more explicit: bosses could face criminal charges for illegal sewage dumping.

Shares in Pennon, Severn Trent and United Utilities are rated a ‘hold’ – presumably on the basis that such sanctions will force a clean up of the sector.

There is no certainty of progress on this, or any other measures. 

But there is the certainty of thrills and spills. To spread your bets, you could always climb aboard for the ride on an index fund like Fidelity Index UK Fund, which is Interactive Investor’s top tip.