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Widespread equity market disruption is unlikely when Britain's Labour party takes power after July 4th, as polling data overwhelmingly predicts. Labour has signalled a higher minimum wage and corporation tax, both areas that would hit large employers, but the extent to which the party has the will, and the backing, to move the needle on these issues remains to be seen.
Still, there are a three areas where we see potential change coming and where there is little opposition to proposed changes. Here, investors can position themselves for success.
Home Builders
We are building roughly the same number of homes every year as we were in 1980, despite the UK population being almost 20% higher today. The lack of housing built under the Conservative government over the last 14 years is one of the principal reasons for discontent among the non-home owning population, who have seen prices rise massively while forced to watch from the sidelines, paying increasing rents.
One of the Labour party's promises is to overhaul planning regulations to reduce red tape involved in building homes. Although it is unclear exactly which regulations would be changed and how quickly this could happen, such actions would boost UK homebuilding shares.
The country's homebuilders have taken a beating, losing two thirds of their value peak to trough, over the last four years. As things stand, names like Persimmon [PSN] and Barratt Developments [BDEV] are offering more than 50% upside potential to our fair value estimates. Expectations around home completions, as implied by current share prices, are simply too low relative to what the companies themselves are guiding for. Whether a Labour government manages to close the home completion vs expectations gap remains to be seen, but the ouster of the current government may raise investors' hopes for change and boost homebuilder shares.
Utilities
Higher energy prices, mostly as a result of the Ukraine war, hit consumers' pockets hard and brought the normally dull utility sector into the political spotlight. As energy prices have begun to fall, the spotlight has shifted to water companies, with the media recently reporting that 70% of the UK water industry is in foreign ownership. While some of this represents minor stakes in UK publicly-listed utility firms, some of this investment is tied up in privately owned assets like Southern Water and Thames Water. Both of these firms have experienced chronic underinvestment and have subsequently been involved in environmental scandals like the dumping of raw sewage. Given the public outrage about this, it is no wonder that the Labour party have named this as an area of action.
Unlike the Labour shadow government of 2019, which under the leadership of Jeremy Corbyn promised nationalization of utility firms, this iteration of Labour has promised less extreme ways of dealing with errant water utility firms, including fines for management and increased powers for the country's water regulator. Ultimately, we don't feel this will move the needle for water stocks, but it could lead to further negative investor sentiment. We currently see zero upside for United Utilities [UU.], the sole water stock under our UK coverage.
In addition to this regulatory stick, Labour are also dangling a large carrot to utilities: a policy to push forward the Conservative Party's promised decarbonisation of the power grid by 5 years. This would require sizable investments that could benefit utilities shares.
Expediting the decarbonisation of the power grid would be a positive for National Grid [NG.], where we see moderate upside at the moment. The second derivative, and potentially more attractive play, would be in power generation utilities such as Orsted [ORSTED], Centrica [CNA], RWE [RWE], and SSE [SSE], all of which are 4 star stocks at the moment. Many of these firms are currently investing heavily in renewable energy and would benefit from increased government financial incentives to move further in this direction. These four names fall under the diversified or renewables segments of the utilities sectors, which are currently the cheapest segments of the sector trading at around a 30% discount to our fair value estimates.
Defence Contractors
Both the Conservatives and Labour are highlighting defence as a policy priority. We spoke last month about serially underspending NATO nations; while the UK has been meeting its 2% of GDP target, both political parties are committed to upping this to 2.5%, which would mean a boost for defence firms – especially those based in the UK. How quickly this can be done within budget constraints is another question, but the Conservatives' original timeline was a staggered increase from 2025-2030. Labour are likely to at least match that.
A rise in defence spending to 2.5% of GDP isn't entirely new policy, but rather a reversion to spending levels prior to the Conservatives' ascent to power in 2010. The change could be significant for defence companies, with about £17 billion a year in additional spending to go around. Recent strong results have sent their share prices rallying, with much of our coverage now fairly valued. German defence provider Rheinmetall [RHM] is our top pick in the space, currently a 4-star stock.
See our explainer of how a Labour government would affect taxes and personal finance
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