Stocks that can profit from Labour’s election plans

• Investors may be hoping for the best, but fearing the worst
• Fears that Labor will revert to old ways of taxing and spending
• But you can take advantage of this new climate

After the election, investors can hope for the best but fear the worst.

For example, the new government has indicated that it may push UK pension funds to massively increase their holdings of UK stocks, a strategy that would revive UK markets.

Yet the memory remains of the huge blow to our pensions from the abolition of dividend tax relief during Tony Blair’s first term at No 10.

The uncertainty is unnerving, compounded by fears that Labor will be tempted to return to its old ways of taxing and spending.

But for now, stock market pundits seem happy to take advantage of the conditions created by the current government’s “don’t scare the horses” stance.

If you’re up for the gamble and prepared for nasty surprises, here’s how to take advantage of the opportunities in this new climate.

Background

There is talk in some quarters that a wall of money will hit UK markets, driving share prices higher.

The latest survey of Bank of America fund managers reveals considerable enthusiasm for UK stocks.

But pundits will be watching the rhetoric from Labour’s left, aware that the faction could rebel and demand more spending.

David Coombs, wealth manager at Rathbones, says: “For the first 12 months or so, the government is likely to be sensible, even a bit gray – and markets tend to like a bit of grey.

“Also, the possibility of greater contact with the EU on regulation and trade could attract people who manage money overseas to see value in Britain and support the FTSE 100.”

But he warns that after about 18 months, it will be harder for the government to meet its spending commitments.

Anyone who doubts Labour’s ability to be in charge over any time horizon should realize that the state of the economy limits the room for manoeuvre.

Frederique Carrier of RBC Wealth Management says: “The new government is likely to find its policies constrained by weak national finances – with a fiscal deficit exceeding 4 percent of GDP and government debt just above 100 percent.”

Also, as Rupert Thompson, chief economist at asset manager IBOSS, points out, a Labor government will fear spending and tax increases could cause a “Liz Truss moment”.

Action plan

As Carrier argues, there are reasons to be happy about UK equity markets.

“In RBC’s view, low UK equity valuations mean that takeover interest from international competitors – and private equity – is likely to remain elevated.” However, the outlook for different sectors differs.

The ambition to deliver 1.5 million homes through this Parliament is good news for housebuilders.

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

Optimism also surrounds defense stocks such as BAE, Babcock, Chemring, Qinetiq and Rolls-Royce.

Charles Stanley’s Garry White highlights Labour’s commitment to the Trident nuclear deterrent and a pledge to increase defense spending to 2.5 per cent of GDP “as soon as resources allow”.

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

Saxo Bank’s Peter Garnry is similarly bullish as “the defense industry is already experiencing many setbacks from the war in Ukraine and the rearmament of Europe”.

The outlook for oil and gas is less favorable thanks to policies such as a plan to increase tax on British producers’ profits from 75 percent to 78 percent by 2029.

Two energy giants, BP and Shell, may bear some additional taxes. However, the threat caused Jersey Oil & Gas, Neo Energy and Serica Energy to delay investment.

But Labor may water down the proposal as it could mean more oil and gas exports from Iran and Russia – and cause the loss of around 100,000 jobs.

There must also be doubts about the wisdom of leaving the North Sea, while there is so little clarity about the mission to make Britain a “clean energy superpower by 2030”.

Greencoat UK Wind Investment Trust is my bet on the profit that could flow from this transition. However, the trust’s share price is a 17 per cent discount to net asset value, underscoring that it is a bargain only for the patient.

Labour’s policy statement on water management is clearer: bosses could face prosecution for illegally dumping sewage.

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

Progress is uncertain on this and other measures.

But there is a certainty of excitement and spillage. To spread your bets, you can always get on and ride around in an index fund like the Fidelity Index UK Fund, which is Interactive Investor’s top tip.