Which investment sectors will see the biggest impact from the 2015 General Election?
TD Direct Investing reports
May 7th has been billed as one of the least-certain elections in British history. We’re likely heading for another coalition government, and whoever wins, we’ll face constitutional uncertainty over the status of Scotland, and potentially over Britain’s place in the European Union. Market commentators recently warned that “a soothing outcome for markets is hard to imagine”.
As we know, uncertainty tends to create volatility, which in turn may create the opportunities around the big day. Here are some key sectors that are in focus during the run-up to the election – and beyond.
Utilities
The utilities sector has already been hit hard by electioneering talk. Labour leader Ed Miliband has promised to freeze energy bills until 2017 if he gets into power. He also wants the regulator, Ofgem, to have new powers to force through price cuts if companies don’t seem to be passing on falls in wholesale prices. While the coalition government has countered by arguing that falling oil prices make this promise irrelevant, it’s hard to see anyone coming out and fighting the corner for a group as unpopular with consumers as the Big Six energy companies.
Yet, as a market commentator told Morningstar earlier this year, there’s also the thorny question of “who should pay for the £375bn that UK power utilities claim must be spent on upgrading and developing power distribution infrastructure.” With companies already heavily indebted, consumers unwilling to pay higher costs, and the taxpayer hardly in a position to help out due to our country’s existing hefty debts, shareholders could find that the burden falls on them – perhaps via new share issues, reduced dividends, or both. So while an election victory for the Conservatives or coalition might see something of a relief rally, don’t expect the pressures facing the sector to go away quickly.
Banks
Due to its many past misdemeanours, plentiful taxpayer-funded bailouts, and an apparent tendency not to learn from its mistakes, the banking sector is an easy target for a cash-strapped government looking to raise money from whatever sources it can find. Already, chancellor George Osborne’s last Budget confirmed that the banking levy is a tax that won’t go away, even under a Conservative government. Meanwhile, the sector as a whole faces competition, both from new ‘challenger’ banks, and from the ‘peer-to-peer’ (P2P) lending sector, which has broad support from both ends of the political spectrum. Plans to allow P2P loans to be placed in Individual Savings Accounts (ISAs) can only increase public interest in this sector and broaden the threat to high street banks.
However, it might be worth keeping an eye on those banks that are still at least partly state-owned – Lloyds and RBS. The former looks likely to be the beneficiary of a major re-privatisation campaign, particularly if a Conservative government is in place after May 7th, which – given the huge success of the Royal Mail privatisation – could drum up interest in both the company and the sector as a whole. Another interesting point to bear in mind is that, according to research by Axa Wealth, recent history shows that financials have tended to beat the market in the three months following a general election – so perhaps a sector to focus on in the aftermath.
Construction
If one thing is sacrosanct to the British electorate, it’s the housing market. So almost regardless of who gets into power, you can expect policies that favour making it easier for voters to pay ever-increasing prices for homes, such as the recent “help-to-buy” ISA innovation from Osborne. Encouraging more building is also an easy way for governments to bolster GDP figures.
That said, the sector has come a very long way from its post-crisis lows – housebuilders have seen their share prices soar, with many seeing their value double, treble or more in the last three years or so. It’s also worth noting that, even as governments fuel the housing mania at the lower end of the price spectrum, there is pressure to crack down on those at the wealthier end of the scale. Proposals such as the ‘mansion tax’, promises by both parties to focus on tax avoidance, and a generally more hostile attitude towards wealthy foreign investors have already had an impact on the London market. Even so, analysts at Jefferies recently upgraded many housebuilding shares from ‘hold’ to ‘buy’, citing a stronger pre-election housing market than expected. So there could be life in the sector yet.
Tobacco
Smoking is another unpopular vice and thus, like banks, tobacco companies make for an easy target, particularly for an ageing country which is desperate for new sources of funding for the NHS. Cigarettes must now be hidden from view in shops, which comes ahead of a move towards ‘plain packaging’ from next year. Meanwhile, Labour has promised to introduce a ‘windfall’ levy on tobacco companies, while the coalition is looking at the issue as well. While any such levy would be passed onto consumers, it could at the very least hit sentiment towards the sector as a warning sign of further measures.
Support services
The country’s biggest support services companies have done well out of governments looking to outsource contracts in recent years. However, scandals over various high-profile contracts have knocked some of the gloss off the sector, and as a market commentator points out, the chances are that more contracts will be brought back under state control in the event of a Labour victory. The same market commentator also warns that bus and rail companies could come in for a hard time under a Labour government if there is a move towards renationalising rail services.
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