Three UK investment sectors to watch this election season

(Image credit: Getty Images)

published 6 June 2024

Prime Minister Rishi Sunak and Labour leader Keir Starmer went head to head on Tuesday night in the first of the general election TV debates.

We are now starting to get a clearer picture of the key issues and policies for Labour and the Conservatives – including how these could impact different sectors within UK investment markets.

Sunak wanted to talk about tax, but other battlegrounds that loomed large included the cost-of-living crisis and the NHS. While they had slightly less air time, climate change and the economic hurdles faced by first-time buyers also made an appearance.

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One topic that didn’t come up in much detail during the debate (other than through the lens of the Conservatives’ new national service policy) was defence.

Nevertheless, this is likely to be another important topic in the coming weeks, with Sunak having already pledged to increase UK defence spending to 2.5% of GDP by 2030, if he is re-elected.

We focus on each of these areas and the sector implications for UK equity investors.

How will the election impact the energy sector?

When it comes to the energy sector, we have to consider both the old world and the new. On the one hand, a Labour victory could be bad news for oil and gas companies. As one of his six “first steps for change”, Starmer has pledged to set up a publicly-owned clean power company to “cut bills for good and boost energy security”.

The party plans to pay for this using a windfall tax on oil and gas companies. A temporary windfall tax known as the Energy Profits Levy is already in place under the Conservatives, but Labour has previously indicated it could increase the levy from 35% to 38%.

Meanwhile, the Conservatives are typically seen as being more friendly to the oil and gas industries. Sunak has said he would use the UK’s fossil fuel resources in the North Sea to bolster the UK’s energy security.

“We’ve seen in the last couple of years what has happened when we’re held hostage by dictators like Putin. We can’t have that happen,” he told factory workers in Milton Keynes.

On the other hand, a Labour victory could be good news for renewables. The party’s proposed clean power company, also known as Great British Energy, promises to “invest in clean energy across [the] country”. Labour says this will include “making the UK a world leader in floating offshore wind”.

Utilities companies that have the infrastructure needed to support transition could be set to benefit from a Labour government too. For example, the party says that upgrading the national grid is “key” to the success of its plans “so that we have the infrastructure we need to move forward”.

“The renewable energy sector would be an obvious beneficiary of a Labour government,” says Darius McDermott, managing director at FundCalibre. In his view, a Labour government would be highly dependent on the private sector in bringing its plans to life.

He explains: “Labour is set to inherit a cash-strapped operation, and therefore will need the help of the private sector to support its renewable energy ambitions. Consistent, well-targeted public funding could crowd further private capital into the sector through co-investment, providing a major boost to the UK’s renewables sector.”

Energy secretary Claire Coutinho accused Labour of not being “honest about the costs” associated with their net zero targets.

How will the election impact housebuilders?

Another area of focus in the first election debate was the extortionate cost associated with getting on the property ladder – a tough hurdle for first-time buyers.

Starmer said he has plans to build more houses. As a result, some market commentators believe the sector could do well under a Labour government. MoneyWeek’s former executive editor, John Stepek, points to these arguments in a recent newsletter for Bloomberg.

He says: “Analysts Tobias Woerner and Charlie Campbell reckon it might be worth looking at housebuilding and its related sectors, including brickmaking and builders’ merchants.

“Why? Because Labour is keen to ramp up housebuilding, and could probably do so quite quickly by reintroducing mandatory targets for local areas, says Campbell. As a result, you’d see demand for building products go up again from its recent low point.”

Stepek agrees this is a solid rationale, but says the case for housebuilders “would exist even if we weren’t heading for an election”, as housebuilding is cyclical and interest rates have now stabilised. Indeed, rates should be on a downward trajectory from here, which should be good news for the sector.

Would a Conservative victory be good news for the defence sector?

Sunak has pledged to increase UK defence spending to 2.5 percent of GDP by 2030, if he wins the election. This could be good news for the defence sector. As Jason Holland, managing director at Bestinvest, notes, “the UK is a major player in the global aerospace and defence sector”. Big names include BAE Systems, Rolls-Royce, Babcock International and QinetiQ.

Meanwhile, Starmer has said the UK would be “fit to fight” under a Labour government, but the exact nature of the party’s plans are not yet clear (other than its commitment to Trident).

“Rising UK defence spending could boost the domestic defence sector, creating both jobs and hopefully providing a welcome lift to the broader UK stock market,” Holland explains. He adds that aerospace and defence stocks “represent about 3.8 per cent of the FTSE 100 and 3.4 per cent of the wider UK market, compared to 1.5 per cent of the S&P 500”.

Historically, many investors have decided to steer clear of this sector on account of environmental, social and governance concerns. However, since Russia’s invasion of Ukraine a couple of years ago, the focus has shifted towards security and defence, with some investors now seeing the sector in a different light.

Katie has a background in investment writing and is interested in everything to do with personal finance, politics, and investing. She enjoys translating complex topics into easy-to-understand stories to help people make the most of their money.

Katie believes investing shouldn’t be complicated, and that demystifying it can help normal people improve their lives.

Before joining the MoneyWeek team, Katie worked as an investment writer at Invesco, a global asset management firm. She joined the company as a graduate in 2019. While there, she wrote about the global economy, bond markets, alternative investments and UK equities.

Katie loves writing and studied English at the University of Cambridge. Outside of work, she enjoys going to the theatre, reading novels, travelling and trying new restaurants with friends.