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Stocks and markets to watch if Keir Starmer and Labour win the general election

The election is set for 4 July. Which markets are most likely to respond to a new government?

lse Source: Getty

Conservative Prime Minister Rishi Sunak has called a general election for 4 July, roughly six weeks from today. With CPI inflation falling to just 2.3% in April, and the International Monetary Fund pouring cold water on further tax cuts, the political calculation may be that this is the best date the current government is going to get.

For context, the polls make for grim reading for the Tories — and while nothing is ever certain in politics, most analysts agree that Keir Starmer is likely headed for Downing Street soon.

Here’s the top segments to watch in anticipation.

Best stocks and markets to watch

Nationalisation: rail and utility stocks

Railways are the obvious first target, as Labour has already pledged to nationalise almost all passenger rail services within its first term in power. New body Great British Railways will take up the slack as private companies’ contracts run out. It’s worth noting that private companies have been running the railways since the 1990s and have benefitted from government subsidies in this time.

It's clear that something needs to change, as customers can find flying between UK cities or even abroad and back is cheaper than the equivalent train ticket. While there may be room for some enterprise, private operators such as FirstGroup may well be adversely affected, while Trainline's business model could also be hugely disrupted.

Of course, the public-owned British Rail was hardly perfect, and the new government may find it a struggle to keep this promise.

Water could also be nationalised. There is no competition in a monopoly and as the Thames Water fiasco, the sewage pollution of UK rivers, and the recent disease outbreak in South Devon demonstrates, it could be a popular policy choice. Companies in the UK that may be affected include Severn Trent, United Utilities and Pennon Group.

Great British Energy: energy stocks

Starmer has promised to create ‘Great British Energy,’ a new publicly owned energy generation company, and within the first year of holding power. Currently, many UK-based energy generators are foreign-owned, but Labour hopes the plan will allow the UK to receive the economic benefits of the transition to renewables.

GBE would have operational independence but work within a framework where the mandate is to invest in clean energy. It will be able to invest in partnership with private companies, and potentially in riskier investments that the private sector is hesitant to front. Labour would start with £8 billion in seed capital, with a view that the new entity would eventually become self-sustaining.

While the move is popular with voters, the party is marketing the venture as a new player in the market, meaning that current companies will not be nationalised. However, while there may be new opportunities for current operators, on the day the plan was announced back in 2022, shares in Drax and Centrica among others fell by high single digit percentages.

The plan is also going to be funded by the current windfall tax on UK-based energy companies; larger multinational such as BP and Shell are largely unaffected, though smaller operators like Harbour Energy have already been hit hard — and junior explorers are to an extent giving up on investing in the region. Indeed, Stifel thinks that UK domestic production of oil and gas could halve by 2030.

FTSE 100

Interestingly for short-term traders, Schroders research from 2017 indicates that as long as the result is regarded as fairly certain, in the six weeks leading up to a general election, the FTSE 100 tends to move positively. Of course, past performance is not an indicator of future returns — and unlike past elections the index continues to flirt with record highs.

Over the medium to longer term, the UK arguably remains a stable investing environment, and the FTSE 100 is likely to remain a popular investing choice for its dividend stocks.

Perhaps one key area to watch will be Labour’s plans to reduce delistings from the London Stock Exchange and attract more IPOs. In January, Shadow Chancellor Rachel Reeves told delegates at Davos that the party planned to restore the UK’s reputation for business by putting private sector investment at the heart of its growth strategy.

An improved IPO market can improve the valuations of companies already listed.

GBP/USD

The GBP/USD is of course affected by politics; for example, if Labour chooses to borrow heavily to invest this could put pressure on sterling. However, the biggest movements between the pair tend to revolve around interest rate decisions at the Federal Reserve and at the Bank of England.

The UK central bank has indicated it may be prepared to cut rates before the US, though a higher-than-expected CPI reading, and strong unemployment figures, mean that a June rate cut that previously seemed to have balanced odds is now expected to be pushed out later into the year.

It’s also worth noting that if the Bank of England does cut first, it could make dollar-priced imports more expensive, which could in turn lead to a resurgence of inflation.

Capital spending: infrastructure and healthcare stocks

Labour has in the past tended to invest in public infrastructure and has indeed already made some promises in this arena.

And companies build infrastructure, not governments. Investment into hospitals, transport, water, the electricity grid and broadband could all be coming soon — businesses like Kier Group could be well placed to benefit from large public sector contracts. Serco, which markets itself as a leading provider of public services, could also do well.

Housing remains a hot topic, and Labour may consider incentivising housebuilders. Vistry Group (formerly Bovis Homes) places an emphasis on affordable mixed tenure homes, and given the dire lack of social housing, Mears Group could also be a prime beneficiary of future policy. However, others including Persimmon and Barratt Developments may also gain from any broad-based revival of state support, such as Help to Buy.

Given the general geopolitical instability, Starmer has also promised to increase UK defence spending to 2.5% of GDP ‘as soon as resources allow.’ Titans such as BAE Systems or Babcock could be winners of this policy.

Increased investment in the NHS has also been pledged — while drugmakers and household names like AstraZeneca and GlaxoSmithKline may benefit, lesser-known names may be more interesting investments. In particular, medical device manufacturer Smith & Nephew could see increased demand — as could private healthcare provider Spire Healthcare, which collaborates with more than 8,000 experienced consultants, who could help get waiting lists down.

Contracting private healthcare to help solve the crisis may be ideologically difficult but would also be a practical solution to the longstanding problem.

The caveat

On top of the effects on individual markets, many analysts consider that a new government could help refresh the international perception of the UK as a place to do business and invest. In particular, small and mid-cap UK-listed shares, several of which have been subject to private equity bids over the past few months for their relative cheapness, may start to close the valuation gap.

However, the key caveat to consider is that much of the expected positive (and in some cases negative) effects of Keir Starmer winning power may already be priced into these assets.

Perhaps the best opportunities are hidden further under the radar — and the election remains weeks away.

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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