How will a Labour election victory affect the UK stockmarket?

If Labour wins the 4 July election, as polls currently predict, several industries like housing, construction and healthcare will see an influx of investment, others like transport and water will face changes. While winning parties are notorious for only partially keeping their campaign promises, particularly when it comes to spending money, nevertheless we expect to see changes in the stock market.

The UK rail sector

Labour’s transport manifesto called Getting Britain Moving stresses that the party intends to make changes to the hot mess that is the UK rail network from the day it takes office. Labour plans on setting up the publicly owned Great British Railways which will inherit passenger rail contracts currently held by private firms as they expire, a process it expects to be completed within its first term in office.

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That idea is not as radical as it looks. Over the last 13 years several failing train companies have been folded into the Operator of Last Resort which is under government control, including the Transpennine Express in 2023 and before that the London North Eastern Railway.

Large parts of the UK train network are owned by private equity, indirectly by foreign governments including the Italian and German governments, by French railways and Canadian pension funds. The only two publicly traded companies are FirstGroup LON:FGP and digital ticket platform Trainline LON:TRN.

While Labour’s plans to renationalise the railways initially hit FirstGroup stock, shares started bouncing back as it became clear that it may take a few more years before the company is affected. FirstGroup operates Great Western Railway and South Western Railway. The government is likely to let the current rail franchise run its core term over the next 12 months and then potentially extend the contract for the next 12 months while it deals with companies that are performing worse than GWR and SWR.

When it comes to Trainline shares, we see no strong reason for them to come under pressure. Trainline is being widely used, particularly by a younger generation of travellers, and the only threat to it would be the government creating a better web-based sales platform, something Labour has already rejected in conversations with journalists.

Housing and construction stocks

The housing sector has already started picking up, even before Labour’s recent pledges to invest in affordable housing and infrastructure. The bounce back had more to do with inflation coming down and expectations of interest rate cuts than any policy pledges.

Still, some construction and building materials companies will definitely benefit from a change of government as Labour has grand plans for construction. This is good news for Morgan Sindall LON:MGNS (up 24% over the last six months), Keir Group LON:KIE (up 30% over the last six months) and Costain LON:COST (up 32% over the last six months).

It is a different story for infrastructure companies like Balfour Beatty LON:BBY – up 8% over six months – as big shiny government contracts can be a poisoned chalice if the funding gets suddenly pulled, like in the case of the planed H2S. Over £3bn of Balfour Beatty’s revenue comes from UK construction, of which 95% comes from the public sector, which makes it very sensitive to the change of political winds.

Healthcare stocks

While Labour party said that will try and rebuild the NHS after years of underfunding, it also stressed that it would use “spare capacity in the private sector” to reduce NHS waiting lists. This will be positive news for the UK’s largest independent network of private hospitals Spire Healthcare Group LON:SPI, which has rallied by over 100% over the last five years. We expect medical equipment maker Smith & Nephew PLC [ LON:SN.] to also be an indirect beneficiary of higher government spending in the UK healthcare sector.

Water stocks

Looking from the outside it seemed as if Labour might initiate a similar nationalisation process for water companies as with rail companies, after a series of scandals over sewage water and high bills. However, the party is actually split in half over whether to opt for nationalisation or not, given the high costs that this would involve.

A case in point is Labour’s cautious approach to Thames Water, the water operator with £18.3 billion in debt and in line to be nationalised if it doesn’t find any private investors to bail it out. Labour is not rushing in to save Thames Water which may mean that water companies are unlikely to face the same process as train operators in the first part of Labour’s term. There are only three listed water companies left on the London stock exchange: Pennon LON:PNN, United Utilities [LON:UU] and Severn Trent [SVT], all of them trending lower over the last six months. Labour may “save” this problem for another day.

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