Tax and don't spend
Given the extent of the fiscal turnaround that's required, tax rises are probably inevitable whoever gets into Downing Street. And whether Labour or the Conservatives win, cuts to public sector spending are on the way to varying degrees, too. Even Alistair Darling has said that he would push through cuts that are "deeper and tougher" than those implemented by Margaret Thatcher, while a 50 per cent reduction in government borrowing over the next parliament is "non negotiable".
With schools and health spending hardest of all to cut, the Institute of Fiscal Studies (IFS) says that areas such as defence, transport, and local government are likely to bear the brunt of the cuts should Labour remain in power. The IFS is also sceptical that the Treasury will be able to achieve its projected £11bn of efficiency savings. But at least the IFS is even-handed - it says the Tories will need to find another £8bn of as yet unidentified savings to eliminate the structural deficit over the next parliament, too.
The Conservatives have pledged to halt a 1 per cent rise in national insurance contributions due take effect next year. That will cost an apparently unfunded £5bn at least, and they've also pledged to raise the inheritance tax threshold to £1m, freeze council tax bills, and reduce corporation tax. That suggests they have to be even more aggressive cutters than Alistair Darling. With that dividing line between the two parties it's possible to identify sectors that are especially sensitive to the two political outcomes.
Brewing vats
Take the pub and restaurant sectors – Labour could benefit these sectors most. That's because taxation under Labour is likely to be softer on low and middle-income households where spending power is limited and which account for much of the sectors' customer base. So demand could hold up better under Labour.
What's more, the Conservatives may be more aggressive on VAT. Indeed, at 17.5 per cent, the UK has the fourth lowest rate in Europe, where the average is 20 per cent, and Labour's Ed Balls reckons that VAT hikes will be the Tory's secret weapon in faster deficit reduction. An increase to 20 per cent VAT could mean a take that's above the £80bn peak raised in 2007-08 and could discourage consumption, while any extension of VAT to new areas, such as takeaways, could hurt companies such as Domino's Pizza.
Still, the Conservatives score a plus point for pub and restaurant shares on labour market de-regulation - putting it crudely, they are less fussed about workers' rights which means they are less likely to push up staff costs with new legislation.
Preserving pubs remain a cause celebre for all politicians and the big tenanted-pub groups, such as Enterprise Inns and Punch Taverns, tend to take most flak over pub closures. But recent suggestions that Labour may help communities buy the freeholds of ailing pubs could be very good news for these groups.
Banking on a consensus
Inevitably, after so much government intervention in the sector since 2008, a focus on banks can't be avoided. But, strangely, given the Tory party's traditional image as the City's friend, the banks seem to have most to lose from a Conservative win. That's because they are proposing a hefty bank tax to claw back the state cash used to bail the banks out.
True, that's something that Labour wants to do, too. But, crucially, the Tories are planning to do it without an international consensus having first emerged that would see other countries with major financial centres do the same. So, not only would there be a painful tax to pay, but their proposals could also leave the UK's banks at a competitive disadvantage. That's bad news for earnings and, should lenders relocate overseas to avoid the tax, bad news for City jobs as well.
Beyond that, there's not much to differentiate the impact of the two parties on the banks. It's conceivable that the Tories might try and sell the state's shares in Lloyds and Royal Bank of Scotland sooner than Labour - by offering them to the public, potentially at a loss to the HMT. And regulation, which will certainly get tighter, will continue to follow an international agenda set by such bodies as the Basle Committee and the EU - regardless of who governs.
Broad band of votes
IT-based companies are also worth some thought. Much of the pre-election talk has been of high-speed broadband, with the Tories promising 100mb connections for most people as it targets rural areas; a project they claim will create 600,000 UK jobs. Meanwhile Labour is slapping a 50p-a-month tax on every landline in order to fund super-fast broadband for 90 per cent of homes by 2017. That might be bad news for landline users, but it could help boost the broadband offering at such companies as BT.
More generally, current UK technology champions, such as ARM or Autonomy, aren't likely to see much difference regardless of who is in power. But drill below the blue-chips, and applications specialists that can bring either cost or efficiency benefits may well prosper as public sector spending is cut back. So, with the Tories expected to swing a bigger public spending axe than Labour then firms such as electronic paper sorter IDOX could be among those in the technology sector that benefit from a change in government.
Carbon agenda
Both parties are committed to a low carbon economy, but the pair have slightly differing methods of delivering it. Labour remains committed to incentives such as Renewable Obligation Certificates (ROCs), which give bigger subsidies to key technologies such as offshore wind, and feed-in tariffs for micro-generation, whereas the Conservatives would consider a feed-in tariff for larger-scale production, too.
New nuclear and clean coal technologies both have cross-party support, as does development of a 'smart grid' and increased use of energy efficiency tools such as smart meters, although the Conservatives would accelerate their deployment. The Conservatives want to reform the Climate Change Levy into a Carbon Tax aimed at putting a floor under the volatile carbon price, giving stability for those making investment decisions in long-term energy projects.
Labour has introduced legally binding 'carbon budgets' and has also set up an Office for Renewable Deployment and Infrastructure Planning Commission to try to smooth development of large-scale renewable power schemes, some of which the Tories would retain. Both parties have also proposed the creation of a Green Investment Bank to help fund renewables projects. And with an estimated £200bn of spending required in the energy sector in the next decade as it focuses on reaching exacting emissions reduction targets, then investment opportunities will abound whichever party wins.
Tories spook property
Property, too, looks electorally sensitive. Funding for first-time buyer deposits has thrived under Labour, with the Homes and Communities Agency pumping funds into HomeBuy and KickStart schemes. These have provided a lifeline for housebuilders, with as many as one in four sales of new-build properties now relying on shared equity assistance in some form. However, HomeBuy Direct funding expires in September 2010, and there's no guarantee that a Tory government would continue it.
What's more, Tory proposals to overhaul the planning system are considered dangerous by housebuilders and property developers. Known as 'localism', their planned overhaul would give much more power to local town halls, and encourage 'Nimby-ism' and objections to planning applications for homes and commercial developments.
Still, Labour's new stamp duty holiday for first-time buyers on purchases of up to £250,000 will be great for those who benefit, but it's unlikely to make much difference to activity levels in the market. Capital gains tax, however, must rise at some point, and will probably be the first port of call for the next chancellor's budget. That could push buy-to-let landlords into making a choice between getting out now or staying put for the longer term.
Diverse construction
In construction, and assuming that significant cuts are on the cards whatever the election outcome, then it will be those companies that have done most to offset possible cuts that cope best. Carillion, for example, has been most effective in broadening its revenue stream away from construction and into maintenance. Margins there are far higher, and while building a new motorway may fall foul of cuts, maintaining existing motorways will not. Meanwhile, Balfour Beatty has diversified away from the UK and, while this will continue to be an important revenue stream, the group now generates nearly half its turnover overseas. What's more, it has the scale to compete for non-discretionary work in the regulated sectors such as water and energy. So diversification remains the key, and the consequences of not diversifying are plain to see. For while there were other factors involved, a lack of diversification was one of the reasons why rail contractor Jarvis recently ceased trading.
Defence looks defensive
Amid all the allegations about the possible underfunding of the armed forces, it's unlikely that defence spending will fall much over the next few years. But it won't rise much, either, and pressure on the procurement budget is likely to see some big ticket projects cancelled. The new aircraft Queen Elizabeth class aircraft carriers, which Babcock has a big interest in, or the Trident replacement are all in the firing line as the government tries to tackle the deficit.
The Conservatives, in particular, are hostile to replacing trident and are thought to favour a less expensive upgrade that will extend the life of the existing system by 15 years. And while firms such as BAE are now global enough not to be completely reliant on the UK defence budget, there's less incentive to maintain production capacity in the UK if there's a limited home market for items such as armoured vehicles. On the other hand, the ongoing war in Afghanistan, which neither party has shown an inclination to exit from, should mean that the budget for overseas operations will be largely unaffected - which is good for the likes of Cobham and Chemring.
Transforming transport
Nearly two decades after the privatisation of British Rail, and public transport remains politically sensitive. Although it's actually bus services that are more likely to be affected by a change in government, after having received generous subsidies under Labour. Gordon Brown wooed the grey vote by giving over 60s a universal free bus pass. This might be an area the Conservatives would trim if they had a convincing enough mandate – ominously for the smaller operators skewed towards UK bus routes such as Go-Ahead.
Rail transport is less politically sensitive, partly because the average passenger is relatively better off and partly because the investment cycle is longer than the political cycle. Although, after National Express handed back the loss-making East Coast franchise, transport secretary Lord Adonis has commissioned a review into the franchise system and wants to extend the typical contract term from seven to a more commercially realistic 15 years. That could survive a change in government, but it's not clear.
Conservative outsourcing
Whichever party wins power, business process outsourcing (BPO) will be a winner. Government departments need to be more efficient in order to cut the deficit and BPO can help as it enables services to be maintained at lower costs for taxpayers.
That's potentially good news for those support services companies that are BPO focused. But with the Tory bias towards cutting spending more deeply and faster than Labour, then those BPO focused players in the sector could do better in the event of a Conservative win. Capita and Serco look like potential beneficiaries from a Cameron government. Capita has the largest outsourcing market share in the UK, at 27 per cent, supported by a robust track record. Serco has a 60 per cent exposure to the public sector in areas such as prisons, waste management and defence. Still, a hung parliament would weigh on support service companies' shares and public spending decisions are likely to see delays.
Ring-fencing health
Budget cuts looks certain in parts of the NHS's operational budget, whichever party assumes power. Word from inside the health department is that some areas, such as training budgets for non-medical staff like occupational therapists, are slated for cumulative cuts of 15 per cent over the next five years.
To maintain the ring-fence on healthcare spending would also require impossibly drastic cuts in other departmental budgets. So some right wing think-tanks are already advocating that a third of all hospital beds are closed and care is instead focused on disease prevention – that would be bad news for those providing direct services to the NHS. There could be more pressure for flexible staff contracts, though, which could benefit companies such as Healthcare Locums, or a rise in independent treatment contracts could help Care UK. Still, strictly controlled NHS medicine sales don't matter that much to the UK's global pharmaceutical companies, so cuts aren't likely to make much difference to such players as GlaxoSmithKline and AstraZeneca.
Media's campaign boost
Perhaps the most interesting election news for the media sector is the period of the campaign itself. That's because huge TV, radio and billboard campaigns will be mounted by the three main parties. Clear advertising budget estimates are hard to come by but recent speculation suggests that Labour has an £8m advertising war chest, while the Tories boast £18m.
The Conservatives recently signed up London-listed M&C Saatchi, the advertising consultancy set up by Margaret Thatcher's favourite ad men, Maurice and Charles Saatchi. It will work alongside the Tory’s main campaigner advisor Euro RSCG, owned by French firm Havas. And in an ironic twist, Labour's main advertising gurus are Saatchi & Saatchi, the brother's original business that is now owned by Paris-based Publicis.
Elsewhere, market researcher YouGov could see bumper income from research commissions, while newspaper groups including Trinity Mirror, Johnston Press and Daily Mail are all likely to enjoy some election-based ad space demand. Broadcaster ITV is thought likely to see revenues bolstered by about 8 per cent hike in TV advertising revenues in March.
