The sectors and stocks to watch as the new Burnham government gets to work

A cabinet reshuffle following a change of leader can have major implications for bond and equity markets. Even though new prime minister Andy Burnham has pledged to stick to fiscal rules, there are signs that he will do things differently.

Markets are forward looking and they will be trying to second guess what path Burnham and new chancellor John Healey will follow. There are obvious parts of the market under the spotlight based on what the pair have said so far, and what Burnham has discussed in preceding years.

Bond markets remain calm

It is natural for bond markets to be slightly nervous around political change as it creates uncertainty. Some people have attributed rising gilt yields this year to fears over Burnham becoming prime minister and boosting spending and borrowing. In fact, events in the Middle East have been largely responsible for driving up gilt yields.

The Iran war has pushed up oil prices which in turn fuelled inflation fears and changed interest rate expectations from cuts to hikes. That has a direct impact on government bond yields.

Bond markets have been calm during the transition from Keir Starmer to Burnham. The official forming of a new government on 20 July saw gilt yields steady until the afternoon when they jumped after Burnham made remarks about fiscal flexibility. While he has pledged to stick to existing rules, he implied there is wriggle room within them.

The comments initially caught the market off guard, but Burnham was quick to say he would not take any risks with the economy. That was a soothing tonic for bond investors.

John Healey’s surprise appointment as chancellor did not trouble the markets as they see him as a safe pair of hands. His extensive parliamentary career including previous roles in the Treasury put him in good stead.

Burnham’s first major policy announcement was to remove VAT on household electricity bills, suggesting it could be funded by the cancellation of the digital ID programme. It is a punchy move, but Healey knows bond markets will not allow him to make any unfunded tax cuts and speculation is already rife that the numbers may not add up for this policy. Bond markets take no prisoners, and they will be quick to protest if they view government policies as irresponsible.

Retail and leisure sectors

Burnham wasted no time positioning himself as a man of the people. The VAT removal on electricity bills will be the first in a series of measures to relieve cost of living pressures on households.

Assuming the initiatives stack up, they stand to boost consumer confidence which in turn could lead to greater consumer spending.

Burnham has already slashed business rates for pubs, clubs, and music venues by 20%, a Christmas-come-early for companies lumbered with increased labour costs under Keir Starmer and Rachel Reeves.

It would be particularly important for the pubs sector which is basking in the glory of a World Cup tournament that drove a much-needed sales boost.

There is also talk Burnham could raise the threshold at which smaller, independent hospitality, leisure and retail companies start to pay business rates. Increased rates on large warehouses used by logistics companies and online retailers like Amazon could help to fund it. Clearly not good for landlords, but it does show that Burnham is keen to get on the right side of the business community. That is something which Reeves failed to do by the end of her time in Number 11.

Defence boost

Having the former defence secretary become chancellor is seen as potentially positive for the defence industry. John Healey worked hard to push through a plan for higher defence spending, resigning from Starmer’s cabinet when told that he would not get the funding he felt was necessary. There was always the risk a new chancellor might argue that extra defence spending is not worth it, but investors are now taking the view that risk has gone away.

The UK market is awash with defence stocks involved with domestic operations. These span BAE Systems, Babcock, and Rolls-Royce at the top end, to Qinetiq, Chemring and Cohort at the mid and lower ends.

The positive share price reaction across the defence space on Healey’s appointment was telling. However, it is important to consider that so much good news has already been priced into defence stocks, and this industry has a reputation for contract issues. The defence sector is no stranger to project delays and cancellations, and increased government spending is not a guaranteed ticket to riches.

Banks in focus

There were rumours long before Burnham got the keys to Number 10 that he might target the rich if he became prime minister and make them pay more tax. The same principle could apply to sectors that are making significant profits, whereby Burnham forces them to make a bigger contribution via tax receipts to help pay for more public services.

Banks look like a target, particularly as they have reported bumper earnings in recent years. Banks might argue they play a significant role in lending money to small and big businesses, thereby feeding into the country’s economic growth.

The banking industry feared higher taxes under Reeves, but this did not materialise. They might not be so lucky this time if Healey is looking for ways to fund other measures to benefit consumers and businesses.

Oil and gas revival?

After speculation around whether Burnham would open the North Sea to more drilling for oil and gas, it looks like the new government might only tinker at the edges rather than rip up the existing ban on new exploration licences.

It’s possible we might see drilling next to existing fields instead of a swathe of rigs looking for the next big discovery.

Harbour Energy, Serica Energy, and Ithaca Energy are among the UK stocks with exposure to the North Sea.

Gambling pressures

The gambling sector has been a magnet for higher taxes, and it does not look like there will be any relief for them under Burnham. He does not seem a fan of gambling and has expressed support for a campaign to phase out gambling sponsorship across all levels and types of sport.

UK high street bookies have already buckled under the pressure of high duties, with William Hill’s owner Evoke having closed scores of shops in response. Any further tax pressure on the sector would be a headwind for FTSE 100 stock Entain given it owns Ladbrokes.

Housing challenge

Labour has had a target since 2023 of building 1.5 million homes by 2029. There is growing doubt the party will hit this goal.

Burnham talked about a desire to build more council homes in his welcome speech as prime minister, but we are currently short on detail.

An overall shortage of homes across the country versus demand has not been the tailwind people thought would propel shares in housebuilders in recent years. Instead, these companies have battled cost inflation and a lacklustre property market, together with headwinds from shifting interest rate expectations. Mortgage affordability remains an issue for aspiring homeowners and the sector is crying out for lower interest rates.

Politicians have long used the property market as a way of appealing to voters, and Burnham may well follow the same path. It is just a waiting game on how he plans to steer the ship.

Utilities ownership

Utilities are meant to be dull and boring. Instead, it is the one sector sitting nervously at the arrival of Burnham in Number 10. He has pledged to bring ‘life’s essentials back under public control’ which could include nationalising certain utility providers.

Thames Water is the obvious candidate given it is in a perilous financial position, but the big unknown is just how far Burnham is prepared to go.

The market does not appear to be pricing in sweeping nationalisation as a sure thing. For example, shares in water groups Pennon and United Utilities have remained firm since Starmer resigned.

The utilities industry has come under criticism in recent years for delivering an inferior performance while paying big dividends to shareholders. Nationalising key public service providers would give the government control of companies to improve service quality and plough back any positive returns from customer payments into public finances.

Utilities require significant ongoing investment, and bond markets will want to know how the government would fund upgrades, as well as how any nationalisation programme would work and the scale of existing debt liabilities inherited.

The government might have to issue a massive number of gilts, further increasing supply, and in doing so could lead to higher gilt yields as investors demand a greater risk premium if the country’s borrowing levels go up.