Looking ahead to Labour

THE INVESTMENT COLUMN

With this week's local government elections producing the expected slaughter of the Tories, investors should start thinking seriously about the implications of a Labour government within the next 18 months or so.

The difficulty analysts face in deciding on the impact is the vastly changed nature of the party, even since the last election, when the widespread expectation of victory right up to the poll, confounded by the Tories' surprising win, gave a pretty clear idea of the price the markets were placing on a change of government.

Based on the 1992 experience, gilt prices would initially be about 10 per cent lower and equity and index-linked prices between 5 and 10 per cent lower following a Labour win. Research from Hoare Govett suggests that the "Labour risk- premium" starts to be factored in to prices about nine months before an election.

But the prospect of a Labour win is not necessarily bad news for all sectors. Within the general market there will be companies and industries which do relatively well and others that fare badly. Portfolio allocation will be the key.

The market's main worries about Labour concern higher public spending and, as a result, higher public sector borrowing and taxes. Interest rates are likely to rise, sterling will probably fall and inflation could edge up.

Other issues include Labour's still uncertain approach to a minimum wage and other workers' rights and whether the government will attempt to make hostile takeovers more difficult. A question mark hangs over all the formerly nationalised industries, although they now seem safely in the private sector.

On the positive side, increased uncertainty following 16 years of continuous Conservative rule will favour defensive stocks, including oil companies, brewers, pharmaceuticals companies and food retailers.

Some of these will also benefit from their high overseas exposure should sterling fall, increasing the value of foreign earnings. Some engineers such as BAe and GKN and chemicals businesses like BOC, ICI and Courtaulds also fall into this category.

Higher infrastructure spending should give a boost to builders, engineers and electronics companies. A concentration on technology as part of an industrial policy could help telecoms companies.

As far as the losers from Tony Blair's new-model Labour Party are concerned, the biggest worries concern retailers and the utilities. The stores sector, especially, seems to suffer on a number of fronts.

If interest rates rise to prop up sterling or taxes increase to fund higher spending, consumers are likely to abandon all hope of recovering the elusive feel-good factor.

Margins are likely to be further squeezed if the rights of part-time workers, who largely staff Britain's shops these days, are beefed up or the cost of wages and training increases.

Utilities would almost certainly suffer as the interests of shareholders were eroded in favour of consumers and taxpayers.

It is increasingly difficult to distinguish between Labour and the Tories, so the prospect of a change is unlikely to cause a panic. But now could be a sensible time to adjust the weighting of shares in a portfolio.

Bid rumours refuse to die down at Polypipe, the Doncaster-based plastic pipes-to-garden furniture group.

The stock has been one of the best performers in the building materials sector over the past month and yesterday it hit the year's peak at 169p, up another 4p.

The rise from a low of 122p exactly a month ago has prompted speculation that Kevin McDonald, the 61-year-old joint founder and executive chairman, is ready to put his near-21 per cent stake up for sale and bow out. The story goes that a friendly bid at 225p a share would win over Mr McDonald and in effect deliver up the company.

The City is divided on whether any credible bidders exist, and given Polypipe's excellent record throughout the recession it is not immediately apparent what a third party could add.

On the face of it, companies already in the industry such as Dutch-owned Wavin, owner of the Osma brand, Marley and Hepworth, should also be constrained by monopolies considerations.

Combining any of their market shares in plastic pipes, which range up to 28 per cent, with Polypipe's 20 per cent would appear to send any of them straight through the 25 per cent threshhold at which a monopolies inquiry would be triggered.

But a company like Marley could argue that most of its guttering products go through do-it-yourself outlets, where Polypipe sells mainly through builder's merchants, while it has a very small presence in underground pipes, where Polypipe is strong.

Hepworth, meanwhile, has plenty of reason for expanding its plastic side, given the squeeze it has been experiencing in its traditional clay pipes.

A take-out price of 225p would represent an exit multiple of nearly 16 times, based on forecast profits of £25m this year, falling to 18 if profits rise to £29m in 1996. That would not be unreasonable for a company with such a good record and suggests the shares are worth holding for further developments.

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