Labour goes for growth: where are the stock market opportunities?

Labour was always expected to win the general election but many investors waited until the result was certain before thinking about which stocks or funds might benefit from Sir Keir Starmer’s arrival in Downing Street. If you are one of those investors, this Q&A aims to assist your post-election stock screening.

What types of company do analysts expect to benefit from the Labour government?

Market commentators and City analysts have devoted a lot of their time to this question in recent days. The sectors that seem to have attracted most attention are housebuilding and infrastructure.

It’s notable that the new Chancellor, Rachel Reeves, devoted much of her first speech after her appointment to policies to boost construction.

‘Nowhere is decisive reform needed more urgently than in the case of our planning system,’ she said. Ms Reeves said the government would consult on ‘a new growth-focused approach to the planning system’ before the end of the month, ‘including restoring mandatory housing targets’. It would also ‘create a new taskforce to accelerate stalled housing sites’ and ‘support local authorities with 300 additional planning officers across the country’. There will also be changes to the way that ministers use their powers for direct intervention in planning decisions and reviews of greenbelt boundaries to prioritise ‘brownfield’ and ‘grey belt’ land for development ‘to meet housing targets where needed’.

Labour has said it wants to build 1.5m homes over the next five years, compared with 1.05m achieved over the past five years under the Conservatives, and Ms Reeves confirmed, in comments after her speech, that the government would continue to rely on the private sector rather than the public sector to build new homes.

Analysts at UBS, the bank, said: ‘The Chancellor’s speech reconfirmed our view that the new government is committed to unblocking the currently restrictive housing policy to enable greater construction of new-build homes. Overall, we think this government will prove to be supportive for UK housebuilders from a supply-side perspective, though changes in planning reform should take some time to take effect. A potential risk for housebuilders could be Labour’s comments on increasing the quantity of affordable housing. This could reduce the viability/profitability of new developments.’

Shares in Britain’s housebuilders rose by about 2.5% on the day after the election.

Leigh Himsworth, manager of the Fidelity UK Opportunities fund, said the new government’s policies towards the housing market were ‘absolutely correct’. He said the market had functioned well when there were targets for each local authority but when these were removed by Michael Gove, the Conservative minister, it caused ‘huge problems – there was no building, no building supplies were being bought, no furniture was being bought, mortgages were not being taken out, and so on’. He said these mechanisms illustrated that housing created a significant ‘multiplier effect’ in the economy. He added: ‘Examples of companies affected by these dynamics are the developers MJ Gleeson, Bellway and Vistry, or materials suppliers such as Travis Perkins, or furniture shops such as Dunelm.’ Other listed builders include Barratt Developments, Taylor Wimpey and Persimmon.

When it comes to infrastructure, Ms Reeves said: ‘As of today, we are ending the absurd ban on new onshore wind [farms] in England. We will also consult on bringing onshore wind back into the Nationally Significant Infrastructure Projects regime, meaning decisions on large developments will be taken nationally, not locally.’

The two infrastructure funds on the Select 50 list of Fidelity’s favourite funds are International Public Partnerships, an investment trust, and First Sentier Global Listed Infrastructure, an open-ended fund. However, the former invests in electricity transmission rather than generation and the latter has just 5.2% of its assets in Britain. More targeted exposure to wind farms can be found in funds such as Greencoat UK Wind, The Renewables Infrastructure Group and JLEN Environmental Assets. All have onshore farms in the UK.

Other types of business may benefit from a more general sense that voters’ economic circumstances are beginning to improve. UBS said: ‘The UK consumer had already been benefiting from 4% tax cuts (for most people), utility bills that have fallen 40% and nominal wage gains of 6-7%. The labour government may further support that with more EU alignment and their domestic investment plans including in the economically value-adding homebuilding sector. As the [Bank of England] begins to cut rates, mortgage relief adds further discretionary consumption capacity.’ Such consumption could benefit the likes of airlines, pubs and restaurants, entertainment services and retailers.

Grant Wilson of Asset Risk Consultants (ARC), an investment consultancy, also sounded an optimistic note. He said: ‘In the medium to long term, [Labour’s] reforms could create a more favourable business environment and support sectors with a high domestic exposure. With Labour prioritising higher taxes to finance welfare spending and fiscal consolidation, some analysts suggest that the new government’s proposals could boost demand growth relative to current policy.’

I want to invest via a tracker fund. Which ones offer exposure to sectors expected to do well under Labour?

Many of the stocks mentioned above as potential beneficiaries of Labour’s policies belong to the FTSE 250 index of London’s medium-sized listed companies, which tends to be more focused on the domestic economy than the more international FTSE 100. The 250 index includes companies such as Balfour Beatty, Bellway, Crest Nicholson, Currys, Dunelm, Hollywood Bowl, Mitchells & Butlers, Redrow and JD Wetherspoon. The Vanguard FTSE 250 UCITS ETF (exchange-traded fund), a member of our Select 50, tracks that index.

Will the new government affect the overall direction of the stock market?

The London stock market has lagged its global rivals since the Brexit vote in 2016, partly because of increased scepticism among foreign investors, and some observers think the election marks a turning point in perceptions.

ARC said: ‘Analysts point to a growing belief among investors that Sir Kier Starmer’s resounding win draws a line under a tumultuous period under the Conservatives and should improve the appeal of UK assets.’

Emily Barnard, deputy manager of the Edinburgh Investment Trust, voiced similar sentiments. She said: ‘While there is usually a gap between what a political party promises in a manifesto and what it can deliver in government, the Labour victory should see a meaningful reduction in the political uncertainty risk premium [discount] which has been attached to UK assets for a number of years.’

And Mr Himsworth said: ‘The question to ask is does the potential government look credible – is it relatively centrist, is it voicing the correct rhetoric, etc? Judging by the reaction so far of the bond markets and the currency, the backdrop for investing in UK shares and bonds is positive.’

Over the long term, however, statistics suggest that the market is agnostic about the political complexion of the party in power. John Husselbee, the head of Liontrust’s multi-asset team, said: ‘Looking back through history, you can generally see that the performance of markets has more to do with valuations at any given entry point than the prevailing political winds, especially in relatively centrist democracies. As long-term investors, we take the stance that political events such as this election may create short-term noise, but they are unlikely to materially impact the long-term path of markets. Examples in the recent past of political surprises that caused short-term noise but didn’t derail a stock market are the Trump presidency and the Brexit vote.’

• Read more on the election - Labour and you: what the election means for your finances

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Shares in investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. Investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.