Equity Research; Labour Govt, who gains/ who loses?

UK General Election

With a few days left, I will tempt providence by stating the obvious. A new Labour government with a landslide majority will be elected on 4^th July 2024.

A post mortem of a more hapless campaign, even worse than Teresa May’s 2017 snap election effort, or a more poorly timed election, worse than 1979, is important. This election result was a foregone conclusion, a reality that dawned months ago. In simple terms, the PM could have carried on another six months, but chose not to. At face value, this was political ‘seppuku’.

One way to rationalize this odd decision, is to appreciate that Sunak’s job, as he saw it, was to give his party its best chance at avoiding a catastrophic loss. But that approach assumed this objective was achievable.

However the ‘sea change in politics’ in 2024, as in 1945, 1979 and 1997 made Sunak’s loss minimization strategy impossible.

Frankly any major party that goes into a General Election, with a poor, unplanned campaign, expecting to lose, but thinking post-election, it will regroup, reinvent itself and fight another day, should recognize this as a bad approach with massive downside.

What comes next? A lengthy period of Conservative infighting and recriminations, like Labour’s 1980’s experience looks inevitable. Political wilderness can last decades. It was c. 23 years from Wilson’s October 1974 win to Blair’s landslide in April 1997. In comparing the two, I see Starmer as competent and able, but still a one man band, with a weak team, unlike Blair.

I am a bit worried though. A recent interviewee in a ‘The Rest is Politics’ podcast hosted by Alastair Campbell and Rory Stewart, was Shadow Chancellor Rachel Reeves. When pressed by Stewart on the constraints of Labour’s poor inheritance in 2024, and a UK debt/ GDP ratio of over 100%, Reeves became tetchy, reverting to accusations, contrary to the light-hearted spirit of the show. The interview soured with even Campbell, a lifelong Labour supporter calling Reeves ‘spiky’.

Stewart asked Reeves about funding Labour’s plans for higher NHS spending given near static government income. Reeves mentioned ‘non-doms’, taxes on private equity, energy profit levies, clamping down on tax avoidance, VAT on public school fees and ‘growing the UK economy’ at the highest rate in the G7. Stewart countered that these revenues added up to less than the £10bn cost for the recent contaminated blood scandal and sounded unrealistic. By then though, Reeves’ mask had tangibly slipped. It was the nearest thing to a Liz Truss interview since Liz Truss.

I would point out that the Norwegian government went after the wealthy going so far as imposing large exit taxes on those leaving, a move akin to the practices of the Third Reich. Many HNWs and Norway’s business elite quickly decamped for Switzerland. The result was a brain drain and slumping currency as billions left Oslo. The Labour assumption that the UK non-doms will hang around and stump up is a big one. Similarly the notion that Shell, already debating the merits of the London listing, will stick around long enough to cough up more in UK tax.

I would also add that suddenly adding VAT on public school fees is cruel and will result in hardship, school closures, and kids having to leave school and be relocated in state schools. The policy has the potential for considerable embarrassment to parents and their children.

The new UK government will struggle to correct UK’s imbalances, the generational wealth gaps, and tackle aspirational issues such as ‘levelling up’.

Who are the potential winners?

We need to take Labour’s refreshed commitment to more funding into the NHS at its word.

Possible beneficiaries of this action include:-

1. Tackling the NHS backlog/ overspill, Spire Healthcare
2. Increased surgeries, Smith & Nephew
3. Increased sourcing for NHS staff, Adecco Group, Hays
4. Increased supplies into NHS, Convatec

Defence is likely to feature with the new government needing to increase spending, potential UK/ EU beneficiaries of increased defence procurement include:-

1. Increased anti-aircraft supplies: Chemring, Rheinmetall
2. Increased naval procurement: Babcock, BAE Systems, Thales
3. Increased Royal Air Force ; in our view the 22% reduction in RAF aircraft since 2016 requires more substitute aircraft such as drones
4. Increased cyberthreat spending: Qinetiq
5. Ongoing spending for overseas proxy wars; BAE Systems

Construction & Infrastructure- Labour has committed to building 1.5m new homes over 2024-2029 via changes to the green belt restrictions and allowing Councils more freedom with respect to planning permission. The 1.5m new homes target in five years, is slightly above the total volumes of homes (1.4m) built over the last decade.

The focus is to be on more social rent housing in ‘low hanging fruit’ areas, what is being termed the ‘Grey Belt’, wastelands, disused car parks could be accessed under new rules.

Possible beneficiaries of increased infrastructure building:-

1. Costain Group, Balfour Beatty, Grafton, Morgan Sindall, Kier and Volution.
2. New affordable homes; MJ Gleeson, Travis Perkins

Who are the potential losers?

Labour expects to raise £565m p.a. by 2028/2029 via closing a loophole that allows performance related pay to be treated as capital gains. However having looked at this issue, the proposed reform appears aimed more at the treatment of staff bonuses as income gains, hence subject to income tax as opposed to capital gains tax (currently 28%)

1. Farmers and unlisted company owners: 100% IHT relief on actively farmed agricultural land is likely to change along with business relief which allows 100% relief of unlisted company shares. Following a similar train of thought it is possible the reliefs on AIM companies might be revisited.
2. Energy companies: Starmer has proposed investing £23.7bn over the next Parliament on a green prosperity plan aimed at creating a state owned vehicle ‘Great British Energy” that invests exclusively in renewable energy, wind, solar and wave. The funding for this new company will come from the Energy Profits Levy. Energy suppliers, this encompasses both power generators, distributors, grid and the renewables sector, such as wind and solar are facing higher taxation more uncertain investing environment and a cash drain already underway via lower energy prices – on top of this is a new competitor.
3. North Sea Oil & Gas E&P– in early June 2024 Kier Starmer proposed raising the total tax level from 75% to 78% and banning new licences for oil & gas exploration, as part of a commitment to net zero.

However if new oil & gas exploration is banned this will seriously damage the UK’s ability to develop its offshore fossil fuel assets, and endanger 200k UK jobs according to Unite, the trade union.

Higher taxes, development uncertainty, permit delays will hurt UK E&P companies operating in the UK North Sea: Harbour Energy, Ithaca Energy, Jersey Oil & Gas, EnQuest alongside oil majors, BP, Shell, Equinor, Chevron.

Conclusion

We expect the new Labour government will enjoy a ‘honeymoon period’ that is blessed with an overdue interest rate cut followed up with a second cut before Xmas 2024. The Bank of England will want to reassure capital markets. The uncertainty will lift quickly. I still have a nagging feeling, a temptation to sweat over Labour’s propensity to spend, tax and spend again, but the primary emotional response is one of resignation and fait accompli, given there was no other possible outcome. That said, I wish the new government every success.