Boris Johnson is expected to become Conservative Party leader and Prime Minister at the end of this month, but current polls suggest his only remaining rival, Jeremy Hunt, is ahead among national voters.
The leadership campaign has so far been dominated by whether Britain will crash out of the EU on October 31, but beyond promising to spend more to boost the economy, both candidates have made specific pledges that could boost certain sectors.
Some fund managers, such as Colin Morton, co-manager of Silver-rated Franklin UK Equity Income, argue that Hunt vs Johnson should really be reframed as “Corbyn vs the Rest”. A Tory party winning a General Election, if it is held this year, could offer some form of status quo, but a Corbyn Government, even if it’s a minority one, could have a more dramatic effect on the economy and stock market. “Most City people would say to you that a no-deal Brexit would be a much better result than a Corbyn government,” says Morton.
Sterling is the key to the next general move for the stock market and which shares will thrive, he adds. Any potential "good news" on Brexit will lead to a bounce in the currency would help domestic stocks recover and limit the upside for more international shares like the FTSE 100's biggest gains. Conversely, any economic disruption that hurts the pound could favour companies with less exposure to the domestic economy.
Boris - Sugar, Broadband and Stamp Duty
Boris Johnson is expected to be anointed by party members and unveiled as the new Prime Minister on July 23 and to start work the following day. A TV debate between the two candidates is slated for July 9, by which time more proposals will have trickled out.
Johnson is a known quantity to the City of London, having taken up the post of mayor just before the financial crisis blew up and served during the period in which banks were bailed out and then subject to much tighter regulation. He describes himself as an “evangelist for UK business” and says he “stuck up for financial services during difficult times”. Franklin’s Morton says that both Hunt and Johnson would be welcomed by the City.
In terms of specific policies, Johnson’s plan to raise the higher rate tax threshold from £50,000 to £80,000 has attracted the most interest, but has limited meaning for stock markets specifically – other than to signal that Johnson is in favour of a lower tax regime.
He is known to be fond of “grand gesture” infrastructure projects, including plans to build an airport in the middle of Thames Estuary ("Boris Island" has since been scuppered), so infrastructure stocks and funds could, in theory, be in the spotlight.
His plans to look again at the "sugar tax" could reduce costs for listed food and drinks manufacturers.
One area that is possibly a more realistic beneficiary is telecoms, as Johnson is in favour of rolling out super-fast broadband at a much quicker pace. Morton says BT (BT.A), whose share price has languished in recent years, could be a winner under this scenario.
Housebuilders have had a decent run in recent weeks, helped by wider gains for the stock market. The possibility of stamp duty being abolished for homes below £500,000 gave a boost to housebuilder shares this month.
Jeremy Hunt - Defence, Corporation Tax
Jeremy Hunt’s proposals, while not differing too much from Johnson’s, are an eclectic mix of ideas designed to appeal to specific interest groups. He has made much of his background as an entrepreneur and plans to turn the UK into a “hub of innovation” in the mould of Silicon Valley.
Hunt plans to write off the student debt of people setting up firms with more than 10 employees, which could encourage small and micro-cap businesses. Corporation tax would be cut from current levels around 18% to 12.5% to make it the lowest in Europe. Ireland, where low tax rates have attracted tech businesses, is a clear example of country facing hardship – in its case austerity measures and in the UK’s Brexit – using fiscal measures to attract inward investment.
But Hunt’s comments, as he unveiled his 10-point plan to soften the blow of no-deal Brexit, that some businesses will inevitably go under, jarred with some in the business community such as the Confederation of British Industry (CBI). His suggestion that fishermen and farmers deserved Government bailouts more than bankers also raised some eyebrows.
Since George Osborne’s austerity measures were introduced, the Ministry of Defence has had to bear some of Whitehall’s biggest spending cuts. But Jeremy Hunt plans to give defence a boost. Combined with the planned corporation tax, the Institute for Fiscal Studies estimates that Hunt’s plans could cost up to £68 billion. Both candidates insist there is money to spend in the government’s coffers, cash that current chancellor Philip Hammond would prefer to keep in reserve for a no-deal Brexit.
3 Shares in Focus
BT
Speculation that the Communication Workers Union has drawn up plans for BT to be nationalised has been played down by shadow chancellor John McDonnell. Even if far-fetched, the idea is one that BT investors could do without after a difficult few years. Franklin manager Morton argues that BT, which he describes as a “disastrous investment” for the fund could be a big beneficiary of a Johnson administration. He believes that if a new Government helps ease the regulatory burden, “BT could rebound very quickly”.
Morningstar analysts focus on the troubled relationship with regulator Ofcom, which has forced BT to cut prices charged by its Openreach wholesale division. Still, analyst Michael Hodel says BT’s fair value is 320p, above its current price of around 200p.
BAE Systems
Morton also holds defence name BAE Systems (BA.), which has taken a reputational hit from its links to the Saudi Arabia and the suspension of new arms exports to the regime brought in last month.
Hunt and Johnson, respectively current and previous Foreign Secretary, understand the realpolitik involved in dealing with controversial regimes, he argues. Hunt’s plans to boost defence would see an obvious boost for BAE. Morningstar analyst Denise Molina says that BAE is promoted as a “national champion” by the UK Government and “enjoys an unbeatable advantage” in many markets.
A Corbyn government would be a real risk to the defence sector, Morton argues, and that is currently being priced into the BAE share price. A Brexit deal by either Johnson or Hunt which takes a General Election off the table could lead to a bounce in BAE shares.
National Grid
The power and gas grid operator is also in Jeremy Corbyn’s crosshairs. Labour issued a report in May, “Power to the People”, in which it set out plans to replace National Grid with a National Energy Agency.
The sector has been under a cloud as the Tory party infighting has increased the likelihood of a Corbyn Government. With many firms offering chunky dividend yields – National Grid’s is above 5% - Morton says these companies should be thriving as global interest rates look set to retreat.
“Utilities should have had a stunning year … because safe, boring reliable dividend yields should be good in a world of lower bond yields,” says Morton.
If Johnson or Hunt pull off a Brexit deal, there could be a relief rally in utilities. And even if Corbyn does get in, Morton believes, a fall in exposed sector share prices could offer buying opportunities. This would be compounded if Corbyn then is unable to implement its bold nationalisation plans made in opposition
