Conservative manifesto: stocks to watch
We explain what the Conservative manifesto for the 2019 general election could mean for investors, including how it might impact stocks and the economy.
The Conservatives have released their manifesto ahead of the UK general election as it tries to win a new term under leader Boris Johnson. The party’s campaign is being led by a promise to ‘get Brexit done’ so conversation can finally return to domestic policies after years of neglect.
The Conservatives have traditionally been regarded as the party of business and free market capitalism – and that is acute this year considering the opposition Labour party is campaigning for more socialist-leaning policies.
A vote for the Conservative party is a vote for the status-quo and the continuation of things as they are. However, there are two problems that the party will have to overcome. The first is Brexit: while businesses have generally supported the Conservative’s economic agenda in the past, they do not welcome Brexit, so while the party remains the safest bet for businesses it does not come without risks. The second is the poor state of the status-quo: the Conservatives have been in power since 2010, overseeing a decade of austerity, and is now trying to convince the public that it is the right party to reverse its own decisions. Right now, the status quo does not look particularly attractive, but most businesses would still welcome it considering the radical alternatives on offer by Labour. For example, the Conservative’s pledge to keep a cap on energy prices and overhaul the way railways are franchised will not be popular with energy companies or rail operators, but they are much easier to swallow compared to Labour’s proposals to renationalise them.
Right now, a Conservative majority is the most likely outcome. Aggregated polls collected by Britain Elects puts the Conservative’s share of the vote at over 42% (as at 27 November). That is the highest on record under Johnson, who has almost decimated the Brexit Party that threatened to split the vote. The Brexit Party was polling at a peak of over 20% when Johnson took over, but that has dropped closer to 4% today. Bookmakers believe there is a 69% probability that there will be a Conservative majority, with the next most likely option being a hung parliament, at nearly 35%. Bookmakers think there is less than a 5% chance of a Labour majority right now, with the party polling just under 30%.
The chances of a hung parliament are higher than normal this election, but the need for a majority has never been greater as every party will need one if they are to get their Brexit proposals through parliament and avoid ending up where we are right now – with a deadlock. If the Conservatives do need support from other parties then this will risk bringing the Brexit Party into the fold, which could hamper the party’s Brexit plans.
- Brexit policy
- General policies that will impact all types of UK businesses
- Infrastructure providers
- Defence stocks
- Energy firms, oil companies and frackers
- Retailers, pubs and cinemas
- Health and social care providers
- Online gaming and gambling stocks
- Rail and bus operators
- Automotive stocks
- Police suppliers and prison operators
- New tech R&D, including life sciences
Conservatives pledge to ‘get Brexit done’
The Conservatives want to push through the withdrawal deal struck with the EU in October and has promised swift action if it has a majority. It has said every single Conservative candidate has pledged to support the deal and described it as ‘oven ready.’ It plans to put the deal to parliament ‘before Christmas’ and said the UK will be ‘out of the EU by 31 January’, which is when the current deadline expires.
It is important to remember that the divorce from the EU is only phase one. If the UK leaves the EU as the Conservatives plan, then the next, arguably more complex stage of negotiations, about the future trade relationship between the two will begin. Under the party’s deal, trade would continue as normal under a transition period that would last until the end of 2020. Importantly, the Conservatives have said they will not, under any circumstances, ask for that transition period to be extended. However, this means a new trade deal would have to be struck in less than a year and reintroduces the threat of a no-deal if trade must fall back onto World Trade Organisation (WTO) rules if no deal has been reached by the end of next year. No country has managed to strike a trade deal with the EU in such a short amount of time, and the refusal to consider an extension to the transition period should be a concern.
The Conservatives have said a new free trade agreement with the EU ‘will be a new relationship based on free trade and friendly cooperation, not on the EU’s treaties or EU law’, adding there ‘will be no political alignment with the EU’ and committing to ‘keep the UK out of the single market, out of any form of customs union, and end the role of the European Court of Justice’.
The party aims to simultaneously start negotiating free trade deals with countries outside of the EU during the transition period with a view of implementing them once it ends. ‘We aim to have 80% of UK trade covered by free trade agreements within the next three years, starting with the US, Australia, New Zealand and Japan’, it ambitiously states in its manifesto. It has clearly said that the ‘national health service (NHS) will not be on the table’ and that neither the service it provides or the price it pays for drugs will be up for discussion.
If it takes the UK out of the EU as planned, then the Conservatives intend to overhaul the immigration system to ‘an Australian-style points-based system’. It has said ‘there will be fewer lower-skilled migrants and overall numbers will come down’ and said applicants will need to be able to speak English, already have a job offer, demonstrate they don’t have a criminal record, and hold good qualifications. It says applicants from inside and outside the EU will be treated equally.
The main message is that a vote for the Conservatives is a vote to ‘get Brexit done’ and ‘restore confidence and certainty to business’.
Conservatives: general policies that will impact all types of UK businesses
Before analysing how the manifesto could impact different sectors, here is a list of promises that would impact all types of businesses in the UK, including publicly-listed ones:
- To maintain corporation tax at the current level of 19%
- Introduce a National Living Wage that is equal to two-thirds of average earnings, which would currently stand at £10.50 per hour, and rolling it out to everyone over the age of 21
- No increases in income tax or VAT, while the national insurance threshold will be raised to £9,500 next year, ultimately progressing to £12,500
- Crackdown on large companies abusing supply chains by forcing them to make prompt payments
- Clamp-down on tax avoidance and evasion with a new law targeting up to £35 billion per year, which is the difference between the amount paid and the amount that should be collected
- Reform insolvency laws to better protect suppliers, customers and taxpayers when firms collapse, and introducing better ‘incentives to attack the problem of excessive executive pay and rewards for failure’
- Reintroduce legislation to better protect pension pots from being ‘plundered by reckless bosses’, including a new style of pension scheme that is ‘more sustainable for workers and employers’
- Continue the roll-out of Universal Credit and end the freeze on benefit payments
- Implement the proposed Digital Services Tax on Big Tech
The Conservatives intend to invest £100 billion in building new infrastructure, including almost £29 billion on roads and £4 billion on flood defences. It has committed to major projects including the Northern Powerhouse Rail and the Midlands Rail Hub. It has also thrown its weight behind High Speed 2 – although it has admitted a review is needed as it is severely over budget and way behind schedule. It also backs a third runway at Heathrow, but says it is a ‘private sector project’ that must prove it can meet criteria on air quality and noise pollution. The Conservatives have said ‘no new public money’ will be spent on Heathrow.
Overall, higher spending on infrastructure will be beneficial to companies such as Balfour Beatty, Morgan Sindall, Kier Group, Galliford Try and Mitie Group. Foreign firms like Skanska, Ferrovial and Vinci are also worth watching.
A Conservative government wants the UK to be building 300,000 homes per year by ‘the mid-2020s’ and would continue to rely on the private sector to deliver that goal. That would represent a huge jump from the 150,000 to 185,000 houses (depending on what figures you look at) currently being built each year.
There is understandable doubt surrounding the Conservative plan because it has failed to hit its targets for so many years. Some argue pressure needs to be put on housebuilders to utilise their land more quickly and step-up construction because tightening the gap between supply and demand is not necessarily in their interests. It has also underwhelmed with its plans for social and affordable housing which the Conservatives have neglected for years, stating it will publish new policies in the future. It has, however, said it will fund these by introducing stamp duty on house purchases by foreigners.
Another policy that housebuilders like Barratt Developments, Persimmon, Berkeley Group, Taylor Wimpey, Redrow and Bovis Homes will welcome is the policy to extend the Help to Buy scheme from 2021 to 2023, with promises to introduce ‘new ways’ to help first-time buyers once it does end. The scheme has proven hugely profitable for UK housebuilders over the year. All in all, the Conservatives want to build more homes and make it easier for people to buy them, which should favour the sector.
The Conservatives will ‘continue to exceed’ spending 2% of gross domestic product (GDP) on defence as recommended by NATO with a view of raising the budget by ‘at least’ 0.5% above inflation each year. It has also recommitted to the Trident nuclear deterrent while vowing to build new ships and armoured vehicles in the UK. This is good news for defence companies like BAE Systems, Cobham, Babcock International and Rolls Royce.
It would also invest more in new areas like cybersecurity and establish the country’s ‘first Space Command’. This could be beneficial to the top cybersecurity providers which, according to IDG, includes BT Group, Sophos Group, Cisco and BAE. Also watch stocks involved in the space industry like Airbus, Boeing, Honeywell, Lockheed Martin, QinetiQ and Raytheon.
Energy companies and frackers
The existing cap on energy prices will be maintained under a Conservative government and beefed-up with ‘new measures to lower bills’. The party has a goal to make the country carbon neutral by 2050. This is far less ambitious than rival parties, but that may be welcome news to oil and gas companies as this will give them longer to change their businesses and transition to cleaner energy.
Supporting that view, the Conservatives say ‘the North Sea oil and gas industry has a long future ahead and know the sector has a key role to play as we move to a net-zero economy.’ It has said it will ‘support this transition’ with a ‘new transformational sector deal’, which should prove beneficial to North Sea operators like BP, Shell, ENI, Chevron, EnQuest, and Cairn Energy. This could also have a knock-on effect on services firms like Petrofac, Hunting and John Wood.
In terms of renewables, the Conservatives are placing their bets on offshore wind farms with an aim of raising total capacity to 40 gigawatts by 2050. This could benefit companies that make turbines or their parts, like Vestas and Siemens Gamesa. Other stocks include Haydale, which has made lightning-proof materials for offshore turbines, and Windar Photonics, which has developed sensors for turbines. There is also support service companies like Gulf Marine Services which provide the vessels needed to construct and maintain offshore turbines. International Public Partnerships and is another stock already involved in offshore wind projects in the UK.
Other areas being backed by the Conservatives are hydrogen production, nuclear energy and carbon capture. That could help hydrogen-based stocks like Hydrogen Group, PowerHouse Energy, AFC Energy, and ITM Power, and carbon capture specialists like Velocys. French firm EDF is currently at the forefront of the UK’s nuclear power and is involved in newer developments like Hinkley Point C.
The Conservatives recently introduced a moratorium on fracking in England, which has stopped the industry in its tracks. Labour and the Lib Dems have vowed to permanently ban fracking, although the Conservatives say it ‘will not support fracking unless the science shows categorically that it can be done safely’. Although the election spells trouble for frackers regardless of the result, a Conservative win seems like the best result for them as there is still a glimmer of hope that the suspension will be reversed. Watch stocks such as IGas Energy, Egdon Resources and Angus Energy.
The Conservatives have made the roll-out of full-fibre broadband one of its top priorities and believes a free and competitive market is the best way to do, unlike Labour that thinks BT Group’s Openreach should be nationalised and that broadband should be provided free to everyone. BT Group, which has a monopoly by managing the country’s broadband network, has been calling for government help to fund the cost of such a huge programme of work – with 92% of the country yet to be connected. The Conservatives have pledged £5 billion – far short of the total £30 billion-or-so thought to be needed – to plug the funding gap for the hardest-to-reach places such as rural communities. BT Group should ultimately benefit from a Conservative win because the company will be vital if the party is to deliver its ambitions, and because the alternative is being part-nationalised by Labour.
Retailers, pubs and cinemas
Business rates have become one of the largest cost-burdens on the British high street and those operating bricks-and-mortar stores. The Conservatives have pledged to reduce business rates if it wins by conducting a ‘fundamental review of the system’. In the meantime, it has said it will reduce rates for retailers and ‘grassroots music venues, small cinemas and pubs’. While the details have not been fleshed out, this should provide some relief to shops and could possibly benefit cinema chains like Cineworld (although it may not be classed as ‘small’). Pub chains like Fuller Smith & Turner, Marston's, Young & Co, JD Wetherspoon and Mitchells & Butlers should also welcome the proposals.
Health and social care
The Conservatives have pledged to invest £34 billion per year of additional funding for the NHS by the end of the next parliament. It has already promised to upgrade 20 hospitals in the short-term and plans to build 40 new ones over ten years. Although it has said it will ‘continue to repair the damage done by Labour’s disastrous PFI deals’, it is more willing to include the private sector in the NHS than rival parties. Extra funding and more hospitals should spell good news for providers companies like Capita, Serco, Spire Healthcare and Totally. It is also worth monitoring firms that let out properties to NHS organisations, such as Primary Health Properties and Assura.
Two areas of healthcare that the party has highlighted for extra investment is cancer diagnosis and dementia. This could prove a boon for companies like Oncimmune, which helps diagnosing lung cancer, and Oxford BioDynamics, which is developing diagnosis tools for prostate cancer. Those developing diagnosis tools or pursuing treatment or a cure for dementia, like Biogen and Cambridge Cognition, could also benefit.
For social care, the party has said it aims to ‘build a cross-party consensus’ to solve the crisis. This consensus will ‘consider a range of options but one condition we do make is that nobody needing care should be forced to sell their home to pay for it’. It seems likely that the profitability of social care providers, such as Caretech Holdings, will be reduced but this is less of a threat compared to Labour. In the meantime, the Conservatives have said they will inject at least £1 billion extra per year into social care over the next parliament.
Online gaming stocks and gambling firms
The existing gambling act is out of date, according to the Conservatives. The party thinks it is ‘increasingly becoming an analogue law in a digital age’ and intends to review the legislation entirely, which could have a dramatic effect on players like GVC Holdings, 888 Holdings, William Hill and Rank Group.
Interestingly, it has said it will have a ‘particular focus on tackling issues around loot boxes and credit card misuse’, suggesting those that make video and mobile games could be caught up in the review. This could catch companies like B2B gaming firm Nektan and game developer Frontier Developments.
Rail and bus operators
The Conservatives believe the railways should continue to be operated by the private sector, but thinks they need more accountability. It says it intends to ‘end the complicated franchising model and create a simpler, more effective rail system’. An overhaul to the system may seem threatening but will be welcomed more so than Labour’s plans to renationalise the industry altogether.
The party also wants to expand the railway network by restoring the so-called ‘Beeching lines’ that were cut fifty years ago and by reconnecting ‘smaller towns’. This, twinned with the commitment to major rail projects like the Northern Powerhouse rail and Midlands Rail Hub, should mean more contracts will be up for grabs for companies like Stagecoach, Go-Ahead Group and Firstgroup – even if they could be offered on very different terms to their current contracts.
It is a similar picture when it comes to buses, which all of the above companies also offer (as do others like National Express). The Conservatives plan to ‘invest in superbus networks’ and ‘bring back and protect rural routes’. However, it has also promised to lower fares across the country while keeping prices in ‘urban areas’ flat. Again, this should lead to more contracts but possibly offering lower profitability or stricter criteria.
The Conservatives have a far less-ambitious climate change plan than either Labour or the Lib Dems, and this is reflected in its automotive strategy. The Conservatives have not set a date by which they want to end the sale of petrol and diesel vehicles, but instead have said they will ‘consult on the earliest date we can phase out the sale’ of such vehicles while ‘minimising the impact on drivers and businesses’. This will be welcomed by companies like Nissan, BMW, Honda and Toyota, but they will still be concerned by the Conservative’s Brexit plan.
Although the industry wants government support in rolling out electric vehicles and infrastructure, they will welcome the breathing space that the Conservatives offer because it gives them more time to transition and profit from the sale of their traditional vehicles. Still, the party has said it will support electric vehicles by building out charging infrastructure, pledging that ‘everyone is within 30 miles of a rapid electric vehicle charging station’. It has also backed the idea of building a gigafactory to help aide in the development of electric car batteries.
Suppliers to the police force and prison operators
The Conservatives have pledged to hire 20,000 more police officers to make up for 21,000 it has cut over the last decade. This will mean more services and equipment will have to be purchased as a result, possibly benefiting suppliers like Capita.
It also intends to add 10,000 more prison places and has already committed £2.75 billion to refurbish and upgrade existing facilities. The party does not seem to have a problem with private firms providing these services like other parties, which should benefit existing operators of prisons and detention centres like G4S, Serco, Mitie and GEO Group.
New technologies including life sciences
The way research and development (R&D) is managed will change under a Conservative government. It has said public spending on R&D will climb to 2.4% of GDP and wants to change how R&D tax credits work to incentivise breakthrough areas like ‘cloud computing and data’. It argues more R&D in these areas must be incentivised because they ‘boost productivity and innovation’.
It has said it will also hope to continue collaborating with the EU on R&D and science after Brexit, including continued membership of the Horizon research programme.
The Conservatives have pledged support for one area in particular, stating it wants to make the UK a ‘leading global hub for life sciences after Brexit’. Although details are vague at present, this looks beneficial for the slew of UK life sciences stocks including but not limited to SkinBioTherapeutics, Arix Bioscience and MaxCyte.
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