The General election is just over 12 months away, and the latest YouGov poll shows Labour with a 7% lead over the Tories. It could be time for investors to position their portfolios in anticipation of a potential Labour victory.
There’s little doubt that some sectors would be hit if the Labour party forms the next government. Energy shares have been knocked for six since Ed Miliband proposed a price freeze. He’s also called for a cap on market shares of the big banks and lobbied for greater regulation of high-street bookmakers. Other industries are no doubt looking over their shoulders.
The winners are…
Fortunately, there are some shares that would benefit from a Labour win. That’s because it would very likely lead to a decline in the value of the pound. Indeed Labour’s biggest donor, John Mills, the eponymous boss of gizmo-seller JML, wants an explicit policy to devalue sterling to boost exports and growth. But irrespective of any deliberate policy, it’s probable that the election of a Labour administration that has consistently criticised the Coalition’s austerity package and called for more stimulus measures, and whose natural affinity is with higher spending and higher wages, will lead to a depreciation of sterling.
That would flatter the sterling results — and the hard cash dividends — of companies that do most of their business in other currencies. The dollar-denominated mining sector, and the oil and gas industry, come to mind.
A change in the wind
But also a slew of global companies have been reporting currency headwinds that have held back sales and profits, prompting analysts to take a red pen to earlier forecasts. Sterling weakness would alleviate that and boost reported earnings.
Diageo (LSE: DGE) (NYSE: DEO.US) and GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) are prime examples. Adverse currency movements cost Diageo £54m in lost profits last half-year. It estimates they will knock £280m off the full year, that’s around 8% of total operating profits. GSK saw a 3% drop in operating profits last year, due entirely to currency movements. Earnings forecasts for both companies have been progressively downgraded.
Attractive
Both companies have attractive long-term prospects. Diageo is the world leader in premium spirits and its powerful brands give it immense market power, yet there’s plenty of scope for growth in Latin America and Africa. It has increased its dividend every year since 1997. GSK has turned the corner on the patent cliff and has a promising pipeline of new drugs, whilst its vaccines and consumer health-care businesses add stability. It has paid an increasing dividend for over 20 years.
