Stock to watch under Burnham’s new government
Key Points
- Defence stocks including BAE Systems, Babcock and Rolls-Royce rallied after Andy Burnham appointed John Healey as chancellor
- Burnham has cut business rates for pubs, clubs and music venues by 20% and removed VAT from household electricity bills
- Banks and gambling groups including Entain face the risk of higher taxes under the new government
- Thames Water is the leading candidate if Burnham pursues utility nationalisation, according to AJ Bell
- North Sea operators Harbour Energy, Serica Energy and Ithaca Energy await clarity on exploration policy
Defence groups BAE Systems, Babcock and Rolls-Royce and the pubs sector stand among the early winners from Andy Burnham’s arrival in Number 10, while banks, Ladbrokes owner Entain and water utilities face higher taxes or nationalisation risk, according to AJ Bell.
Burnham became prime minister on 20 July and appointed former Defence Secretary John Healey as Chancellor. Markets have spent much of the first week since repricing the sectors most exposed to their agenda.
AJ Bell Head of Markets Dan Coatsworth said markets are trying to second-guess the path Burnham and Healey will follow, with clear winners and losers emerging from what the pair have said so far.
Defence stocks surge
Healey resigned from Keir Starmer’s cabinet after failing to secure the defence funding he wanted, and investors now believe the risk of a new Chancellor blocking higher defence spending has gone away.
Defence stocks across the UK market rose on his appointment. The sector spans BAE Systems, Babcock and Rolls-Royce at the top end, with Qinetiq, Chemring and Cohort in the mid and small-cap space.
However, Coatsworth warned that markets have already priced in a large amount of good news, and the industry has a long record of project delays and contract cancellations.
Pubs and retail get an early tax cut
Burnham has already cut business rates for pubs, clubs and music venues by 20%.
This comes as a boost for companies carrying higher labour costs imposed under Starmer and former chancellor Rachel Reeves, and one that lands just as the World Cup has driven a sales surge across the pubs sector.
The new government is also weighing a higher business rates threshold for smaller independent hospitality, leisure and retail firms, funded by increased rates on the large warehouses used by logistics companies and online retailers such as Amazon.
Burnham’s first major policy announcement removed VAT from household electricity bills, with the digital ID programme’s cancellation suggested as the funding source.
AJ Bell said measures like these stand to lift consumer confidence and spending if the numbers stack up, though speculation is already circulating that they may not.
Banks and bookies in the firing line
Banks look like a target for higher taxes after years of bumper earnings, according to Coatsworth. The industry escaped a feared tax raid under Reeves but may not be as fortunate if Healey needs revenue to fund consumer-facing measures.
The gambling sector also faces continued pressure. Burnham has backed a campaign to phase out gambling sponsorship across all levels of sport, and high street bookmakers have already buckled under existing duties Notably, William Hill owner Evoke has closed scores of shops in response.
Any further tax rises would hit FTSE 100 group Entain, which owns Ladbrokes.
Utilities and nationalisation
Burnham has pledged to bring “life’s essentials back under public control”, putting utilities in rare focus.
Thames Water stands out as the obvious candidate for nationalisation given its perilous finances, but the scale of Burnham’s ambitions remains unknown.
However, markets are not treating sweeping nationalisation as a certainty. Shares in water groups Pennon and United Utilities have held firm since Starmer resigned.
Coatsworth noted any nationalisation programme would require heavy gilt issuance to fund investment and absorb inherited debt, which could push gilt yields higher.
The government also looks set to tinker at the edges of North Sea policy rather than scrap the ban on new exploration licences, with drilling next to existing fields the more likely route. Harbour Energy, Serica Energy and Ithaca Energy hold exposure to the basin.
On housing, Burnham spoke of building more council homes in his first speech as Prime Minister, but has offered no detail.
Housebuilders continue to battle cost inflation, a flat property market and mortgage affordability pressures, with growing doubt over Labour’s 2023 target of 1.5 million homes by 2029.
