It may seem odd to start this article in China, given it’s on the consequences for investors if Sir Keir Starmer becomes prime minister. But just before Christmas, Beijing gave us an object lesson in how the actions of governments can decimate share prices.
The Chinese Communist Party announced restrictions on the incentives that gaming companies can offer to users to encourage them to play. The move caused shares in Tencent, one of China’s internet giants and publisher of the popular Fortnite game, to fall by 16pc at one point.
Giant companies such as Tencent – its market value is about £285bn – are not supposed to experience such dramatic price changes. If a FTSE 100 company lost 16pc in a day it would be front-page news.
The decisions of the British government can and do affect share prices, however – in both directions.
The value of Trainline, the rail and coach ticketing service, fell by 34pc in May 2021 when ministers said it would face competition from a new app when Britain’s trains were reorganised as Great British Railways. When that decision was reversed in December, shares in the company jumped by 11pc.
On top of the numerous things that can cause unexpected upsets for the share price of any company, investors hardly need another in the form of government whims.
Questor, the Telegraph’s share-tipping column, would be inclined to put at the top of any checklist of investment rules one such as “do not buy shares in any sector or company subject to government interference” were it not for the fact that so many sectors of the economy are nowadays subject to the vagaries of state action.
We should of course bear in mind the possibility that such action can instead be positive for quoted companies in certain circumstances.
If you believe the polls, Labour is strolling towards a big majority when Britain votes on July 4. Here follows our advice about how to navigate this thicket of threats and opportunities for your investments.
The companies and sectors threatened by a Labour government
In Questor’s view, almost any large company, or any in the public eye, could find itself in the Government’s bad books – or indeed find itself seen simply as an acceptable source of funds to address some perceived public need.
An obvious recent example is the windfall tax imposed on energy companies to pay for government support when prices rose after the invasion of Ukraine.
Pious utterances from politicians about the need to offer business a predictable legislative framework, or to support green energy, are forgotten in the face of public calls for immediate but costly state assistance.
So energy or fuel companies in all forms, whether they sell to the public directly or are further up the supply chain, are examples of those at risk from government action. The same applies to broadband or telephone companies and the mobile networks and, if perhaps to a lesser degree, to the supermarkets.
When it comes to specific threats from the election of a Labour government at the forthcoming election, certain sectors look ripe for more regulation, windfall taxes or both.
Top of the list are likely to be the privatised utilities and, in particular, the water companies, although in some cases their balance sheets are too strained to sustain large payments.
Banks have found themselves targeted in the past, but recent announcements that Labour will not bring back restrictions on City bonuses may mark a sea change in attitudes to the sector.
Labour has indicated that it is open to new thinking on the NHS, which could involve a shift away from treating diseases and towards preventing them. This could mean more pressure on tobacco companies and perhaps on alcohol businesses and producers of foods perceived to be unhealthy.
That said, there have been substantial pressures on the hospitality sector since the pandemic – many pubs and restaurants have struggled with higher energy and food prices – and pouring petrol on that particular fire might play badly with the electorate.
...and the companies and sectors that could benefit
Governments have a complex relationship with business. While large companies or entire sectors can find themselves depicted as public enemy number one by politicians when it suits them, ministers are also aware that businesses and their employees pay enormous sums in tax, without which public services would grind to a halt.
More prosaically, governments use private companies to carry out a huge amount of work on its behalf, from building tanks, planes and warships to providing computer systems to the public sector, not to mention a plethora of outsourcing contracts for various services.
All this is true irrespective of which party is in power, so it is far from easy to identify any companies or sectors likely to benefit particularly from a Labour government.
That said, we could speculate that Labour under Sir Keir might be less inclined than the Tories under Rishi Sunak to try to row back on net zero and green initiatives.
Accordingly, it’s possible that companies involved with environmental improvement could be treated more favourably. Questor has tipped several investment trusts that pour money into green energy or into environmental assets more generally. Examples include Greencoat UK Wind, JLEN Environmental Assets and Impax Environmental Markets.
Almost regardless of the election result, the housebuilding sector should receive a boost. It is a quick way to get the economy moving and, of course, to address Britain’s housing shortage. Labour might encourage more “brownfield” site conversions, which are more expensive for the housebuilders but could be encouraged with development grants.
The companies and sectors immune from government interference
We say above that the businesses most exposed politically tend to be large and to deal directly with the public, or have at least a direct impact on the pockets of the public.
If you want to minimise the possibility of political impact on your investments, look for smaller businesses that operate within the bowels of the economy far from the public consciousness.
Examples abound, particularly outside the higher reaches of the FTSE 100 index – many have been tipped in the past by Questor.
Relx springs to mind. It offers data, analysis and research to a wide variety of customers in academia, business and the public sector. It also operates around the globe. Questor cannot see it falling victim in any big way to individual measures put forward by Sir Keir or any other prime minister.
Or Spirax-Sarco. A specialist engineer, it operates in niche fields such as steam systems and temperature management solutions. As another international company, it’s hard to see any actions of the British government having any major impact on its finances.
A third example is Judges Scientific, which designs and produces scientific instruments.
In fact, there are dozens if not hundreds more British companies that can operate profitably below the radar of politicians. For further examples you may want to browse through Questor’s tips.
And of course foreign-listed companies, unless they happen to have significant operations in this country, will be beyond the reach of the British government, although it’s true that changes to the taxation in Britain of dividends or other returns made overseas could hit you in the pocket regardless.
Again Questor has tipped many stocks listed abroad, particularly in our Monday columns.
How will the stock market as a whole react to a Labour victory?
Given the rate at which prime ministers (and chancellors) seem to come and go, investors may be inclined to avoid second-guessing the result of the next general election.
The FTSE All-Share index’s history shows that, on average, the market seems to prefer a Tory government. However, investors have plenty of reasons to take Sir Keir’s big lead in the polls, and any eventual victory, in their stride.
This includes the lack of available cash in the Government’s kitty, the Conservatives’ occasionally frayed relationship with business and the likelihood that Labour took on board the lesson from “Trussonomics” that unfunded promises could prompt chaos.
Labour’s pledge not to raise corporation tax won’t have done any harm in this respect either.
In any event, the prospect of a government led by Sir Keir and Rachel Reeves, the shadow chancellor, is unlikely to spark the sort of fear that would have been inspired by an administration whose driving forces were Jeremy Corbyn and John McDonnell.
Russ Mould of AJ Bell and Rob Burgeman of RBC Brewin Dolphin contributed to this article.
What would you buy to profit in the event of a Labour government? Or would you sell everything? Tell us in the comments below
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