Likely winners and losers under Labour

The Investment Column
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The Independent Online
As 1997 gets under way one thing is certain - there will be an election this year. Not certain but probable is that the next government will be the first Labour administration for almost two decades and many first-time voters will for the first time in their lives experience something other than a Tory Britain. Plainly this year will be a watershed - what does it mean for investors?

A glance at history paints a rather encouraging picture. Some of the best years for stock market investors were in the Labour administration of the late 1970s when, albeit from a very low base after the great bear market of 1973 and 1974, shares quadrupled. The Tory years that opened the 1970s, blighted by the oil shocks and first miners' strike, were an unmitigated disaster for equities.

So much for history. On policy, the rather unsatisfactory answer is that Tony Blair and his shadow cabinet have given so little away that it is hard to make other than informed guesses about Labour's economic and social plans. But a picture is beginning to emerge and it is possible to make at least broad brush forecasts about which sectors will be the greatest winners and losers from a change of government.

It looks likely that Labour will inherit a healthier economic landscape than at any time in living memory. The UK appears to have pulled off the trick of creating economic growth without driving up inflation. Its external account is broadly in balance and unemployment is falling. It would take a loonier strain of Labour than the current one to do too much damage in those circumstances.

There is a fairly broad consensus that the stock market will enjoy a jittery year, even more in thrall to Wall Street than it has always been and vulnerable to even apparently minor pieces of US economic news. .

Within what many brokers predict will be a broadly unchanged market, however, some sectors look more appealing than others. Some of the strongest performers of 1996, sectors broadly influenced by increased consumer spending, look like having another good year. Labour has spoken of becoming the party of low taxation so an early fiscal hit to the consumer looks unlikely, either from higher income tax rates or an extension to VAT. Indeed, one of Labour's few policy commitments is to reduce the rate of VAT applicable to fuel and energy so additional spending power might be freed up from that source.

Best of the consumer areas are those associated with discretionary spending such as retailers, leisure companies, brewers and restaurants. The food sectors are less susceptible to changes in discretionary spending and could lag in the absence of inflation. Alcoholic beverages' fortunes, while discretionary, are determined by wider global pricing issues and may struggle to progress.

Given Labour's unwillingness to tax the individual, it seems likely that it will pay for its other commitments in education and health by increasing the take from corporate taxation. According to NatWest Securities, a 2p rise in company tax to 35p in the pound is possible. That will hit companies across the board, but other widely flagged plans such as the proposed windfall tax will hit certain utilities hard. Much of that is already priced in, however, and arguably some companies now look oversold.

Another area where the stock market may be worrying unduly is service companies where the fear is that the introduction of a minimum wage will push up overheads. Initially the attitude of business to the idea of a pay floor was quite hostile but many quoted companies have changed tack, realising that they pay more than the projected bottom hourly rate and might benefit if smaller rivals are put out of business by the move.

Perhaps the biggest winners of all will be manufacturing companies, which have always been lent a sympathetic ear by Labour. It has usually been prepared to bail British manufacturers out with a devaluation of the pound. There is the prospect of investment being given a boost by increased depreciation allowances and infrastructure spend may increase.

Perhaps the biggest change of all in recent years, however, is the absence of any tangible difference between the two main parties. With economic decisions increasingly governed by the hidden hand of global capital markets, Westminster's power is on the wane. That can only be a good thing for investors.