Widespread
equity
market
disruption
is
unlikely
when
Britain’s
Labour
party
takes
power
after
July
4th,
as
polling
data
overwhelmingly
predicts.
Labour
has
signalled
a
higher
minimum
wage
and
corporation
tax,
both
areas
that
would
hit
large
employers,
but
the
extent
to
which
the
party
has
the
will,
and
the
backing,
to
move
the
needle
on
these
issues
remains
to
be
seen.
Still,
there
are
a
three
areas
where
we
see
potential
change
coming
and
where
there
is
little
opposition
to
proposed
changes–
here,
investors
can
position
themselves
for
success.
We
are
building
roughly
the
same
number
of
homes
every
year
as
we
were
in
1980,
despite
the
UK
population
being
almost
20%
higher
today.
The
lack
of
housing
built
under
the
Conservative
government
over
the
last
14
years
is
one
of
the
principal
reasons
for
discontent
among
the
non-home
owning
population,
who
have
seen
prices
rise
massively
while
forced
to
watch
from
the
sidelines,
paying
increasing
rents.
One
of
the
Labour
party’s
promises
is
to
overhaul
planning
regulations
to
reduce
red
tape
involved
in
building
homes.
Although
it
is
unclear
exactly
which
regulations
would
be
changed
and
how
quickly
this
could
happen,
such
actions
would
boost
UK
homebuilding
shares.
The
country’s
homebuilders
have
taken
a
beating,
losing
two
thirds
of
their
value
peak
to
trough,
over
the
last
four
years.
As
things
stand,
names
like
Persimmon
[PSN]
and
Barratt
Developments
[BDEV]
are
offering
more
than
50%
upside
potential
to
our
fair
value
estimates.
Expectations
around
home
completions,
as
implied
by
current
share
prices,
are
simply
too
low
relative
to
what
the
companies
themselves
are
guiding
for.
Whether
a
Labour
government
manages
to
close
the
home
completion
vs
expectations
gap
remains
to
be
seen,
but
the
ouster
of
the
current
government
may
raise
investors’
hopes
for
change
and
boost
homebuilder
shares.
Utilities
Higher
energy
prices,
mostly
as
a
result
of
the
Ukraine
war,
hit
consumers’
pockets
hard
and
brought
the
normally
dull
utility
sector
into
the
political
spotlight.
As
energy
prices
have
begun
to
fall,
the
spotlight
has
shifted
to
water
companies,
with
the
media
recently
reporting
that
70%
of
the
UK
water
industry
is
in
foreign
ownership.
While
some
of
this
represents
minor
stakes
in
UK
publicly-listed
utility
firms,
some
of
this
investment
is
tied
up
in
privately
owned
assets
like
Southern
Water
and
Thames
Water.
Both
of
these
firms
have
experienced
chronic
underinvestment
and
have
subsequently
been
involved
in
environmental
scandals
like
the
dumping
of
raw
sewage.
Given
the
public
outrage
about
this,
it
is
no
wonder
that
the
Labour
party
have
named
this
as
an
area
of
action.
Unlike
the
Labour
shadow
government
of
2019,
which
under
the
leadership
of
Jeremy
Corbyn
promised
nationalization
of
utility
firms,
this
iteration
of
Labour
has
promised
less
extreme
ways
of
dealing
with
errant
water
utility
firms,
including
fines
for
management
and
increased
powers
for
the
country’s
water
regulator.
Ultimately,
we
don’t
feel
this
will
move
the
needle
for
water
stocks,
but
it
could
lead
to
further
negative
investor
sentiment.
We
currently
see
zero
upside
for
United
Utilities
[UU.],
the
sole
water
stock
under
our
UK
coverage.
In
addition
to
this
regulatory
stick,
Labour
are
also
dangling
a
large
carrot
to
utilities:
a
policy
to
push
forward
the
Conservative
Party’s
promised
decarbonisation
of
the
power
grid
by
5
years.
This
would
require
sizable
investments
that
could
benefit
utilities
shares.
Expediting
the
decarbonisation
of
the
power
grid
would
be
a
positive
for
National
Grid
[NG.],
where
we
see
moderate
upside
at
the
moment.
The
second
derivative,
and
potentially
more
attractive
play,
would
be
in
power
generation
utilities
such
as
Orsted
[ORSTED],
Centrica
[CNA],
RWE
[RWE],
and
SSE
[SSE],
all
of
which
are
4
star
stocks
at
the
moment.
Many
of
these
firms
are
currently
investing
heavily
in
renewable
energy
and
would
benefit
from
increased
government
financial
incentives
to
move
further
in
this
direction.
These
four
names
fall
under
the
diversified
or
renewables
segments
of
the
utilities
sectors,
which
are
currently
the
cheapest
segments
of
the
sector
trading
at
around
a
30%
discount
to
our
fair
value
estimates.
Defence
Contractors
Both
the
Conservatives
and
Labour
are
highlighting
defence
as
a
policy
priority.
We
spoke
last
month
about
serially
underspending
NATO
nations;
while
the
UK
has
been
meeting
its
2%
of
GDP
target,
both
political
parties
are
committed
to
upping
this
to
2.5%,
which
would
mean
a
boost
for
defence
firms–
especially
those
based
in
the
UK.
How
quickly
this
can
be
done
within
budget
constraints
is
another
question,
but
the
Conservatives’
original
timeline
was
a
staggered
increase
from
2025-2030.
Labour
are
likely
to
at
least
match
that.
A
rise
in
defence
spending
to
2.5%
of
GDP
isn’t
entirely
new
policy,
but
rather
a
reversion
to
spending
levels
prior
to
the
Conservatives’
ascent
to
power
in
2010.
The
change
could
be
significant
for
defence
companies,
with
about
£17
billion
a
year
in
additional
spending
to
go
around.
Recent
strong
results
have
sent
their
share
prices
rallying,
with
much
of
our
coverage
now
fairly
valued.
German
defence
provider
Rheinmetall
[RHM]
is
our
top
pick
in
the
space,
currently
a
4-star
stock.
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