What Labour’s landslide means for investors

So the polls were right – more or less. Labour’s landslide general election victory even feels a little underwhelming given some of the more outlandish predictions about how many seats they would win. Certainly, financial markets took the result in their stride – the UK stock market edged ahead in early trading on Friday morning; gilt prices were up too.

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | SIPP Account

But what does a Labour victory mean for individual sectors? Which companies stand to benefit from a change of government – and which might be worse off under Prime Minister Sir Keir Starmer?

These are early days, and some analysts wonder whether the scale of its victory might give the new government the confidence to be bolder than Labour’s relatively timid manifesto. Still, even with what we already know, many fund managers have begun to identify certain stocks set to benefit from a Labour administration, as well as a number of industries where investors may now be feeling anxious.

Five sectors feeling the glow of a Labour victory…

1) Housebuilding

Labour will need to get to work quickly if it is to have any chance of meeting its promise to build 1.5 million new homes in the coming years, which are predicated on reforms to the planning laws. That should be a potential boost for housebuilders and the broader construction sector, says Simon Murphy, manager of the VT Tyndall Unconstrained UK Income fund. His portfolio includes a number of such businesses, including Breedon Group (LSE:BREE), Vistry Group (LSE:VTY), Howden Joinery Group (LSE:HWDN) and Kier Group (LSE:KIE).

“We think the prospects for these businesses are highly encouraging over the medium term, and if the change in government enhances those prospects in the more immediate future that will be great,” Murphy says.

• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis
• Stockwatch: a FTSE 100 stock to buy for better times ahead

Labour’s plans to boost the supply of housing are accompanied by action on the demand side too, analysts point out. Although details are sketchy, its Freedom to Buy mortgage scheme will not be time-limited, unlike initiatives such as Help to Buy. Businesses such as Persimmon (LSE:PSN), Barratt Developments (LSE:BDEV) and Vistry (LSE:VTY) – formerly Bovis Homes and recently promoted to the FTSE 100 index – could be beneficiaries.

2) Consumer and retail

Richard Hunter, head of markets at interactive investor, says a post-election feel-good factor, accompanied by better economic news, including the prospect of interest rate cuts from the Bank of England, can now drive consumer-facing stocks higher.

“Any increase in consumer spending could wash through to the retailers,” Hunter argues. “Boosts could therefore be seen to the likes of Associated British Foods (LSE:ABF), the owner of Primark, sector bellwether Next (LSE:NXT) and the recently resurgent Marks & Spencer Group (LSE:MKS); this could also read across to companies providing building materials as demand picks up, such as Travis Perkins (LSE:TPK).”

Murphy also sees opportunities here, pointing to his fund’s investments in retailers including DFS Furniture (LSE:DFS), Dunelm Group (LSE:DNLM), WH Smith (LSE:SMWH) and Wickes Group (LSE:WIX). “These are typically very strong franchises, run by capable management teams, and trading at what we consider very attractive valuations.”

Christopher Rossbach, CIO of J. Stern & Co. and portfolio manager of its World Stars Global Equity fund, is another manager who highlights the affordability of some of these companies. “The cheapest stocks in our fund are some of the great consumer products companies in the world,” he says. “Diageo (LSE:DGE), the UK company that is the global leader in spirits, Nestle SA (SIX:NESN), the world’s largest food company, and LVMH (EURONEXT:MC), the undisputed leader in luxury, are all great opportunities for long-term investors.”

3) Renewables

Labour was widely criticised in the months prior to the election for watering down its commitments to invest in decarbonisation and the transition to green energy. But Ed Miliband, Labour’s energy minister, remains ambitious, pointing to the new administration’s plans for GB Energy, a publicly owned energy company that will try to catalyse increased private sector investment in wind and solar power, as well as areas such as carbon capture and storage, hydrogen and marine energy.

• Funds and trusts to play next stage of UK market recovery
• Best UK stocks, sectors and markets in first half of 2024

Fund managers are excited by the prospect of a clear and stable approach to the net-zero challenge, even if they hope Labour will go further than its manifesto pledges. “We need to see a step change to speed up the shift to a low-cost clean energy system,” says David Bird, investment director of Octopus Renewables Infrastructure (LSE:ORIT) Trust. “To do this, we need to unblock the grid connection queue and streamline planning processes so renewable energy projects can come online quicker than ever before. We also need to see an acceleration in the shift to electrification in sectors such as heat and transport.”

Action in these areas would be positive for all sorts of companies. The UK’s Drax (LSE:DRX), for example, is now a leading developer of carbon capture and storage capacity. Elsewhere, Christopher Rossbach points to “industrial companies such as Eaton Corp (NYSE:ETN), a global leader in power management solutions for the grid, for warehouses, data centres and semiconductor fabs, and for electric vehicle charging”.

4) Infrastructure

Infrastructure investors are hopeful that the new government will find the resources for a major injection of capital into the country’s creaking transport and utilities networks, as well as new digital projects. Labour has so far been coy about making firm commitments, although it has already launched an independent review of UK infrastructure, featuring representatives of businesses such as Mace and Skanska.

Ed Hunt, a fund manager at HICL Infrastructure PLC Ord (LSE:HICL), is optimistic that Labour will want to work closely with private sector infrastructure businesses. “The government needs to attract private investment in order to achieve the levels of spending needed to both maintain the service levels from existing social infrastructure and to transition to a modern low-carbon economy,” he argues.

“Future procurement should build on the many successes of the Private Finance Initiative, while seeking to improve on some of its perceived shortcomings.” He points to the Mutual Investment Model used by the Labour-run administration in Wales as one possible framework to follow.

One specific stock in this area excites J. Stern & Co’s Christopher Rossbach. “We bought Xylem Inc (NYSE:XYL), a leading water technology company, which is developing solutions to tackle the unprecedented water challenges the world faces,” he says. “It will benefit from the massive investments that the UK water industry will have to make to solve its problems.”

• Investment outlook: bank shares tipped as UK now favoured region
• 18 FTSE 100 stocks about to return billions in dividend income

5) Banking

Finally, Toby Gibb, head of investment solutions at Artemis, highlights one – less likely at first sight – area where he thinks stocks could benefit from the incoming government. While Labour is planning additional taxes on parts of the financial services sector, he argues: “Banking should benefit, simply because greater political and policy stability is a positive for the sector.”

Three sectors with reason to worry…     

1) Oil and gas

“The losers are likely to include conventional oil and gas businesses, given Labour’s strong preference for renewables,” says Artemis’ Toby Gibb. It’s the smaller players – as opposed to the multinationals – that will be hardest hit.”

Indeed, we already have some idea of Labour’s direction of travel here. It reckons a windfall tax on oil and gas companies could raise as much as £10.8 billion over the next five years – a policy the industry claims will cost more than 40,000 jobs. Labour has also vowed to suspend awards of new licences for oil and gas exploration in the North Sea, although it insists there will be no backtracking on existing deals.

2) Transport and utilities

Gibb is also concerned about transport companies, notwithstanding Labour’s plans for infrastructure renewal. “Transportation is highly likely to be a loser,” he warns. “Rail nationalisation will clearly weigh heavily on a lot of players in that sector.”

In a related area, Gibb warns water companies that Labour is likely to have them in their sights. “In utilities, the impact will be mixed, with companies exposed to renewables likely to benefit, but a continuing cloud over water companies,” he says. “Politically, it’s not very challenging to put pressure on a sector that’s pumping filth into the sea.”

• Brace your income for the self-assessment tax raid
• Lump sum vs regular investing: which is best for my ISA?

3) Importers

One fear expressed by some economists, points out ii’s Richard Hunter, is that Labour’s spending will outstrip its pledges. “Depending on the size of any new spending pledges to promote growth, we could see some weakness in sterling,” he points out.

That would be bad news for any UK business that depends heavily on imported goods in its supply chain – from retailers to manufacturers and more. On the other hand, a weaker pound would benefit exporters, Hunter points out. “Looking at the FTSE 100 index as a whole, an estimated 70% of earnings come from overseas, which would make those earnings more valuable on repatriation,” he explains.

And an asset class shrugging off Labour’s landslide

The bond market appears largely unmoved by the prospect of a Labour government, despite claims that the new administration will inevitably have to borrow more than anticipated in the gilts market.

• Bond Watch: Labour landslide calms bond markets
• Pensions case study: how I manage my £1 million SIPP

“One of the legacies of Liz Truss is that there has been much more attention on the relationship between politics, economic policy and the bond markets,” says James Lynch, a fixed income manager at Aegon Asset Management. “But for now, the gilt market will no doubt go back to looking at the latest inflation figures, Bank of England speeches and following US Treasuries for guidance.”

Peder Beck-Friis, an economist at fixed-income specialist PIMCO, believes there may even be opportunities ahead. “We expect the new government to maintain tight fiscal policies,” he says. “This should facilitate a gradual decline in inflation and enable the Bank to begin cutting interest rates soon – and potentially cut more than markets expect next year; therefore, we believe UK government bonds are attractive at current levels.”