There was a time long ago when politics was considered above the sway of private interests. Now investors fret about the tiniest minutiae of government policy - and can even profit if able to call the outcomes correctly.

It is a safe bet that markets will move around over the coming weeks in response to politicians slugging it out on the campaign trail.

Throughout the next two months, we’ll be scouring the markets and analyst research on behalf of Shares subscribers to highlight opportunities as they arise.

Here, we aim to set the scene for the remaining 50 days until we hear the election results. The key risks and opportunities as identified by our sector specialist journalists and third-party analyst research is summarised in the ‘cheat sheet’.

(Click on table to enlarge)

Most analyst research on the election campaign we have seen does not attempt to call the outcome of the poll. It has become too complex a task because of the wafer thin polling gap between the Conservatives and Labour and a significant fracturing of the vote among the mid-tier and smaller parties.

In a piece of analysis written for investment bank UBS, Vernon Bogdanor, professor of government at King’s College London, says the situation is unusual in British politics. ‘A hung parliament is obviously a distinct possibility after the 2015 general election,’ he writes.

‘In the past, Britain had a two-party system. Now, England has, for the first time in her history, a five party system composed of Conservatives, Labour, Liberal Democrats, UKIP and Greens. Scotland, with the SNP, has a six party system. This is quite unprecedented.’

(Click on table to enlarge)

The first-past-the-post voting system also makes things difficult. A change in opinion polls or approval ratings does not necessarily translate into seats immediately. The swing-factor analysis employed by many research companies is subject to a wide margin of error. This has other implications, according to UBS’s research. Parties with a large share of the vote can still end up with relatively few seats, meaning their influence appears much greater before an election than after it.

‘Before the election, UKIP can have a large influence as the mainstream parties adapt their stances to deal with their threat,’ writes analyst David Tinsley.

‘Most obviously this occurs in the policy areas of the European Union and immigration. But after the election, under many scenarios the influence of UKIP would decline markedly as their representation in the House of Commons is likely to be much less than an opinion poll of voting would suggest.’

Current consensus is for a minority government led by either the Conservatives or Labour, propped up by ‘confidence and supply’ from other parties.

Overall, Bogdanor says the uncertainty should not be overplayed. ‘One should not exaggerate the degree of instability,’ he writes. ‘The British economy remains stronger than that of most continental European countries; and, by contrast with some countries on the continent, none of the new parties offer any threat to the democratic system which remains solid and very deep rooted.’

The general stock market outlook is fairly mixed. Analysts at UBS calculate that investment returns around elections are mediocre at best. Looking at stock market performance across elections since 1964, the stock market has tended to do poorly in the three and six months following polling day.

This also tallies with our research on the British economy. Economists at Capital Economics expect output to cool in the next couple of years after some pre-election pumping by the incumbent government (see charts) is scaled back.

(Click on chart to enlarge)

Stock selection will become even more important in the months ahead if this occurs and performance starts to diverge significantly between sectors. We have already seen this over the past six months with a rout in the oil and mining sectors running alongside a rally in domestically-focused UK businesses.

Spotting risks and opportunities ahead of time will be more important than ever, and that’s what we will be aiming to provide over the next few months.

(Click on chart to enlarge)

The return of the electoral cycle

Britain’s economy is in reasonable shape going into the election - mainly the result of a slowdown in the pace of deficit reduction in the country.

We spoke to one economist who says there has been no austerity in the past 12 to 18 months. If anything, the government has loosened its spending in the run-up to the election even as the economy has improved.

This article attempts to assess the likely shape of economic and policy developments in coming years and what the investment implications will be. A focus on the individual sectors is on the following pages.

As well as the mix of economic winners and losers, the electoral cycle itself can also be an important consideration. Here we take a bird’s eye view at the UK’s macroeconomic picture.

Return of the cycle

Our view - guided by economists at research organisation Capital Economics - is that economic performance is likely to cool in the earlier part of the next government term, in a return to the cyclical economic patterns of the past - often centred around and driven by elections.

This may also lead to poorer than usual short-term stock market performance for domestically focused companies - though it is worth highlighting that investment decisions should rarely be based on such short-term considerations.

We are cautious on forecasting short-term market direction for a number of reasons.

One important factor is, as we have highlighted previously (Shares 8 January), the performance of the FTSE 100 is an especially poor indicator of the health of the British economy.

Dominated by trading in its five largest constituents, none of which generate a substantial share of their earnings in the UK, investors are better off tracking the FTSE 250 or - better still - a handful of UK-focused stocks.

Here we focus on the potential impacts of the UK economy on businesses which sell or produce most of their products in this country. After a cracking 2014 for these businesses, this year could be more of a struggle.

This is reflected in a number of our Election Stocks to Watch, many of which are ideas to help readers avoid the uncertainty of the election campaign and potential subsequent economic slowdown.

The backdrop to the electoral campaign is one of improving but still unstable government finances in the UK. Out of a list of 43 countries tracked by the Trading Economics website, the UK has the seventh-worst government deficit at 5.8% of gross domestic product.

The only countries with worse ratios are Greece (12.2%), Venezuela (11.5%), Egypt (9.1%), Pakistan (8%), Japan (7.6%) and Spain (6.8%).

Chancellor George Osborne has reduced the UK deficit figure significantly over the coalition’s term in power, from a peak of 11.4% of GDP in 2010.

But deficit reduction progress has slowed, particularly in the last year, and the chancellor is expected to announce a government deficit of slightly less than £91 billion, around 5% of GDP, for the year to April 2015 in a Budget announcement as Shares went to press.

That is some way short of a pre-election target of £37 billion, announced in 2010.

The government eased off on the pace of deficit reduction because of a weakening economy in the middle of the coalition’s term, according to Samuel Tombs, UK economist at Capital Economics.

The timing of the election may also be playing a role, adds Tombs, as the government makes a last ditch attempt to sway voters. Gordon Brown’s proclamation of ‘an end to the boom and bust’ now looks like ancient history: he engaged in a bit of it himself in the run-up to the 2010 election.

‘Easier government spending is politically motivated and it’s also a response to the slowdown in 2012,’ explains Tombs.

‘The government has significantly scaled back the pace of fiscal consolidation and since the economy has started to strengthen we have not seen any change in this looser fiscal path. The budget is likely to see further giveaways to households.’

Belt-tightening

This is likely to reverse quickly after the election whichever party takes power, according to Capital Economics’ estimates. Tombs expects the economy to grow 3% this year before slowing to 2.5% in 2016 as further cuts to the deficit are enacted.

‘Whichever party gets into power, they will want to deal with the deficit early in the parliament,’ says Tombs.

As well as the usual pre-election gaming, Britain’s wide government deficit is also the result of a persistently-wide trade gap. The late Wynne Godley, a respected former government economist who forecast the 2008 financial crisis eight years ahead of time, argues a government’s deficit must almost always be wider than the corresponding current account deficit.

This is because of a simple piece of economic arithmetic. The private sector surplus (households’ and businesses’ change in net wealth) is equal to the trade (more accurately, balance of payments) deficit minus the government deficit.

American Action

In a paper published in 1999 titled Seven Unsustainable Processes, Godley showed that the US economy was destined for ‘a quite sensational day of reckoning’ as private debt spiralled upwards. That was caused in part by a wide current account deficit and an unreasonably tight government spending policy.

Currently in the UK, with a balance of payments position at -4.4% of GDP and a government budget of -5.8%, the private sector is accumulating assets worth around 1.4% of GDP per year.

For the government deficit to hit 0% of GDP, the private sector would need to borrow an amount equal to the balance of payments deficit - a rate of 5.8% of GDP, on current figures. While this is possible, it would risk creating another bubble in the assets those loans are extended against. In the UK, this is usually property, though lending to small and medium-sized businesses is becoming increasingly popular.

While not expecting an increase of private sector borrowing on this scale, Tombs expects borrowing by households to pick up during the next five years. ‘We are likely to see the private sector in general borrow more over the coming years,’ he says.

‘The deleveraging of businesses and households is now largely complete. As banks become less reluctant to lend I think we will see household borrowing pick up.

‘On the corporate side, it’s less certain borrowing will increase. Firms have stockpiled cash over the last five years, their balance sheets look robust and business investment is more likely to be funded from these retained earnings than from taking on debt.’

(Click on chart to enlarge)

Making Choices

The alternative is for the private sector and government to incentivise or create a framework for greater export-oriented activity.

Tombs says the weakening of the euro and emerging market currencies against sterling means any improvement on this front will be slow.

‘Global growth may be a little stronger this year, which should increase demand for British exports,’ he says.

‘We could see a slightly narrower trade deficit and that, coupled with an improvement in international investment income, will improve the external position.’

International investment income is money earned by the overseas operations and investments of British companies and households. The number has turned negative in recent years, partly the result of sales of international subsidiaries by British firms and increased foreign ownership of British companies.

The other side of the deficit coin is to reduce imports, something which Godley advocated via the use of tariffs. He argued it was the only palatable way for a country with a chronic current account deficit to move into balance with the rest of the world.

Godley, a left-leaning economist, would probably turn in his grave if he realised that today the biggest advocate of that approach is the United Kingdom Independence Party. Its policy to exit the EU could accelerate a more isolationist - or at least protective - trade policy.

TRANSPORT

With the possible exception of perennial hot button topics like immigration, few issues are likely to exercise the voting public more than transport.

Analyst Dominic Edridge at UBS reckons that ‘the general election could be a major issue for investors in the UK transport sector, particularly for the Bus and Rail companies’.

This certainly hasn’t been lost on the Labour Party. As Edridge points out, ‘the policy positions of the Conservatives and Labour appear to be on the surface at least significantly different from each other with regard to rail franchising, ex-London bus regulation’.

Unpacking the rail segment for example, one might imagine the Tories will maintain policy as it stands with re-franchising continuing along its current timetable.

A Labour-led government could see the introduction of state-owned ‘not-for-profit’ concerns to bid on upcoming franchises. It’s also hard to not see how Labour would avoid the imposition of stricter fare-regulation and the monitoring of profits in an industry which still depends heavily on state subsidisation.

Damian Brewer at RBC Capital on the other hand sees the greatest electoral threat facing the Bus Service Operators Grant (BSOG), a subsidy to bus transport providers. This threat ‘is likely to varying degrees with whoever forms the next government. The reduction in hedged fuel costs means this might be (short-term) offset for the bus operators, making it an even more tempting savings target.’

Brewer points out that ‘historically, new UK governments have tended to decide major issues (rail franchising model, airports policy) only following a review after an election.’

It appears therefore that Labour presents the greatest risks to the sector’s profitability going forward and stock selection in this segment should look to company fundamentals as well the diversified nature of the stock’s exposure. Less exposure to UK regulated markets is almost certainly advantageous. (SFl)

National Express (NEX)

With its healthy dividend yield and lower exposure to UK political risk - it derives most of its operating profit from non-UK activities (69% on Liberum’s 2015 forecasts) - National Express is our preferred stock in the transport sector.

Also a bonus is that its long distance coach operations in the UK operate without government subsidy or regulation.

‘The key attraction of National Express is its low exposure to UK political risk, with only 31% of operating profit derived from the UK,’ writes Liberum analyst Gerald Khoo.

Khoo forecasts earnings per share (EPS) of 22.9p in the 2015 calendar year and 24.3p the year after. The stock trades on a 2015 forecast dividend yield of 3.2%. (SFl)

OUTSOURCERS

Fears over an election hiatus of government contract awards look like they are already reflected in the share prices of a number of outsourcing companies.

On a six-month time horizon, only G4S (GFS) and Capita (CPI) have managed to keep their heads above water, in stock market performance terms.

Babcock International (BAB), Interserve (IRV) and particularly Serco (SRP) - which was temporarily banned from bidding on government contracts - have all struggled.

Investors may be able to learn from the last electoral cycle, according to analysts at RBC Capital. Outsourcers gained in the run-up to the election on the expectations of a Conservative victory. They then fell in the months after the formation of the coalition government as contract awards and earnings growth failed to come through quickly, according to RBC analyst David Greenall.

Contrarian investors might take the view the reverse will occur this time around, leading to a post-election relief rally among the outsourcers. But Greenall is not too optimistic on this front. ‘Even a simple Conservative win may cause something of a government re-think with regard to outsourcing,’ he writes.

‘If this does appear to be politically charged during campaigning - and we have seen issues at Barnet Council and Birmingham recently - then the government may not wish to move forward too aggressively with regard to traditional outsourcing in some area.’

In Barnet, Capita was criticised for its handling of a council outsourcing contract. Birmingham’s Council had to in-source call centres previously awarded under contract to Capita after technical issues and higher-than-expected costs.

Labour has less of an inclination to outsource and may accelerate the move towards more state-run services. Greenall says politically-sensitive areas like policing and probation will be high up Miliband’s list - a potential negative for Staffline (STAF:AIM) and Interserve, in our view.

Analysts at Liberum are also cautious on the sector. ‘With an 80% likelihood of a no “overall majority” at the pending UK election, uncertainty is likely to remain high and the pre-election purdah to extend well after the election,’ writes analyst Joe Brent. ‘We remain cautious on the outsourcers,’ he adds.

Brent has ‘sell’ ratings on Babcock and Mitie (MTO) and a ‘hold’ on Serco. Winners, he says could include Mears (MER), which generates 20% of its operating profit from elderly care, an area of spending expected to be protected under any party.

‘Increasing spending on elderly care is still a popular policy,’ writes Brent. ‘We believe Labour has the most supportive policy stance toward the elderly - combining social care and NHS budgets is aimed at directing more funding toward carers and away from accident and emergency rooms.’

Affordable housing is another area where Mears is strong - maintenance and provision of social housing represents the remaining 80% of its operating profit.

Again, this is expected to be a government priority as lack of housing affordability becomes an issue.

Interestingly, voters interviewed by Liberum were critical of infrastructure spending, including the High Speed Two project which aims to improve transport links with the capital.

Any back-pedalling on these issues would be negative for Costain (COST), Atkins (ATK) and Kier (KIE). Libraries were also singled out for spending cuts by interviewees in the survey, a potential negative for distributor Connect (CNCT). (WC)

Capita (CPI) £11.62

An election contract hiatus for outsourcers doesn’t seem to be hurting Capita too much so far. Its full-year results, released 27 February, showed its bidding pipeline swell £1 billion to £5.1 billion.

Despite running into a few problems with its government clients, analysts at Numis are confident the business will deliver 5% revenue growth, excluding the impact of acquisitions.

‘With decisions on the pipeline bid evenly weighted over the next 12 months, we are increasingly confident that Capital will deliver circa 5% organic revenue growth even in a General Election year,’ writes analyst Julian Cater at Numis.

Cater forecasts earnings per share of 71.6p next year in the 12 months to end-December 2015, up 10% from 65.2p this year. (WC)

Serco (SRP) 174p

Embattled outsourcer Serco’s plan for a £550 million rescue rights issue in the middle of a general election campaign has analysts throwing ‘sell’ recommendations at it from all angles.

The potential for government outsourcing to become a key point of contention between political parties, coupled with the short-selling opportunity in Serco’s shares - it pays no dividend - means investors could end up on the hook for a highly dilutive rights issue.

Even if the rights issue passes off without a hitch, Christopher Bamberry at Peel Hunt says a lot of uncertainty remains.

He estimates the stock is on a price-to-earnings ratio of more than 20 times estimated earnings in 2016. This ‘fails to adequately reflect the likely dilution from the proposed rights issue.’

Bamberry has a ‘sell’ rating on the stock and a target price of 135p. (WC)

DEFENCE

In a world of increasing geopolitical uncertainty, one might have assumed that the UK defence sector was one of the few areas that could rely on unchanged or even increased budgets going forward.

But austerity remains the watchword across the wider economy and heading into the home straight before the election, neither of the two main parties are putting defence front and centre when it comes to prioritising funding.

The Conservatives are unlikely to deviate from their plan of cutting the deficit, no tax increases and ring-fencing health, education and international aid and it consequently seems likely that other areas could face significant cuts.

Charles Armitage at UBS cites a report by think-tank the Resolution Foundation which posits that ‘defence could face cuts of a further third or so (having being cut 8% in the period 2010 to 2013)’.

It continues: ‘This would appear to break the Conservative promise of a 1% annual increase in real defence spending from 2015.

‘Clearly, cutting a further 30-34% would be very harsh. All areas of defence would be hit, but the British Army could probably fare worst and the Royal Navy best (or least bad).’

The Ministry of Defence (MoD) and companies that earn from its contract awards are unlikely to fare any better if Labour sweep to power in May.

As has been highlighted here and elsewhere, the likelihood of this general election producing a government where any party gets a governing majority is pretty slim and as a consequence, if Labour were to form a government, they would probably do so either as a minority with a ‘confidence and supply’ agreement or as the senior partner in a coalition.

This raises the question of who is likely to prop up Labour in the event of not achieving an outright majority. The Scottish National Party - set to become the UK’s third-largest party (if pollsters are to be believed) - is a possible candidate.

Working on the assumption that the SNP is willing to do business with the Labour Party, RBS, in its UK General Election Guide looks at the potential stumbling blocks to such a deal.

‘In that scenario, the SNP’s opening gambit is likely to be over Trident (the UK’s sea-based nuclear weapons system, housed in specialist naval facilities in Scotland): a decision on whether or not to renew Trident will need to be taken during the lifetime of the next Parliament, and the SNP is viscerally opposed to any such renewal,’ the report says.

‘Thus, Ms. Sturgeon has presented the scrapping of Trident as the SNP’s ‘absolute priority’. In any case, the SNP has suggested it will not enter a formal coalition with Labour but rather look to provide support to a minority government in any deal it strikes.’

Based on their limited exposure to UK defence budgets, GKN (GKN) and Meggitt (MGGT) have the potential to outperform irrespective of which parties (or combinations thereof) come to power in May. (SFl)

GKN (GKN) 359p

With UK defence exposure of less than 5%, GKN posted a solid set of final results on 24 February and is a stock to watch for investors looking to steer clear of election uncertainty.

The aerospace and automotive specialist posted organic sales growth of 4% on a constant currency basis. At actual exchange rates, sales declined 2% because of a £403 million adverse currency translation impact.

Trading margins in the year to the end of December were up 50 basis points, at 9.2%, and return on average invested capital was 17.7%.

Liberum analyst Jack O’Brien likes GKN’s ‘leading positions in growing markets, investment in future technologies and M&A potential’.

He has a 425p price target and ‘buy’ rating on the stock. (SFl)

Meggitt 560p (MGGT)

With only 10% exposure to UK security spend, Meggitt is another stock which provides some resilience in the face of defence spending cuts.

The business, which makes components and electronic systems for aerospace, defence and energy customers should be able to bounce back from a below par 2014, according to Investec analyst Rami Myerson.

‘Increased management attention to civil aftermarket, tailwinds from a lower oil price and strong traffic growth should drive a sustainable improvement in profit and cash,’ he writes.

This should drive earnings per share of 36.2p in the year to end-December 2015 and 40.7p the year after, Myerson estimates.

He rates the stock a ‘Buy’ with a 580p target. (SFl)

GAMBLING

High street bookmakers Ladbrokes (LAD) and William Hill (WMH) could see their share prices hit at the general election if political parties use the controversy surrounding Fixed Odds Betting Terminals (FOBTs) to win votes.

The machines have been called the ‘crack cocaine of gambling’ because they enable punters to stake up to £100 every 20 seconds.

A coalition of 80 local councils recently urged the government to cut the maximum stake to just £2 per spin, in line with other types of gambling machines. A study by the Responsible Gaming Trust on 1 December refrained from recommending this cut but it didn’t give any definitive conclusions due to the ‘complexity of the issue’ and lack of data.

The Conservative Party has so far held off on cutting the maximum stake and has instead decided that from April customers wishing to wager over £50 will have to use an account or load cash on the machines over the counter. There’s a risk Labour could paint the Conservatives as uncaring about poorer people and call for further restrictions to win favour among those who highlight the links between FOBTs and addiction, violence and money laundering.

Up to £40 billion a year is waged on the roulette and poker-style machines, which are worth up to £1.4 billion a year in profit to the industry. JP Morgan estimates a cut in the maximum stake to £2 would reduce the gross win of a machine by 60%.

Ladbrokes and William Hill, the biggest high street bookies, have already been hit by higher Machine Games Duty, shop closures and proposed planning permissions.

‘The political debate earlier [in 2014] about FOBTs was partly responsible for declines in the share prices of both companies in our view. An increased political focus on FOBTs has the potential to further undermine share prices,’ says stockbroker Numis. (EP)

Ladbrokes (LAD) 111p

Compared with William Hill and Paddy Power (PAP), Ladbrokes gets the highest proportion of profits from high street shops versus online betting so it’s most exposed to FOBT regulations. It has already said the £50 legislation will result in a ‘mid-single digit’ impact on machines from April. ‘Regulatory headwinds’ were partly blamed for an almost halving of pre-tax profit to £37.7 million in 2014.

The £1 billion cap’s share price has fallen by 31% over the last year to 111p. Numis says it could fall further to 100p citing falling earnings, numerous regulatory challenges and the uncertainties which will come with a new chief executive, who is yet to be appointed. (EP)

UTILITIES

Energy companies have become something of a political football over the last electoral term.

Consumer-facing firms in the sector have performed particularly poorly since Labour’s cost-of-living campaign kicked off in earnest at its September 2013 party conference.

In the wake of rising gas and electricity bills that year, Ed Miliband called for an energy price freeze lasting 20 months from the general election.

Analysts at RBC Capital Markets say investors can expect more of the same in the election countdown.

‘We see few reasons for either Centrica (CNA) or SSE (SSE) to reverse this underperformance in the run-up to the general election,’ writes equity analyst John Musk.

‘A Labour victory or Labour-led coalition may result in further underperformance post-election.

Counteracting this to an extent, Musk says recent declines in energy prices and inflation figures may take some of the ‘sting out of the tail’ of the cost-of-living debate in the election campaign.

Water utilities may provide some shelter for income seekers looking to avoid the uncertainty. A recent regulatory review by regulator Ofwat ‘delivered a tough but arguably fair regulatory review for the sector’, says Musk. ‘We believe Ofwat’s achievements will hold water if questioned during the election season.’

Changes to inflation also impacts utilities because price-setting is usually linked in some way to the retail prices index (RPI). Analysts point out inflation is generally expected to be higher under a Labour-led coalition or government.

Any benefit from this is likely to be offset by the party’s more aggressive stance towards the regulated utilities.

Lower inflation would hurt Severn Trent (SVT) the most, according to Musk’s estimates. A 1% decline in RPI causes a 3.4% decline earnings per share at the Midlands-focused water utility.

National Grid is the least exposed to falling inflation in the UK. Its US operations and sterling-denominated inflation-linked bonds mean it may even benefit very marginally in the short term, with EPS boosted around 0.5%. (WC)

Centrica (CNA) 238p

One of the most exposed stocks to pre and post-election political wrangling in the utilities sector is Centrica, according to analysts.

Investors received their first unwelcome surprise this month as the integrated energy giant cut its dividend for the first time in its history. The pay-out in 2014 fell to 13.5p from 17p the year before.

Harold Hutchinson, who covers the stock for Investec, says it’s time to batten down the hatches.

‘In our view, Centrica faces enormous challenges from the apparent reversal of the UK energy liberalisation agenda and from the immediate energy commodity development. Its main sunk asset - its British Gas brand - is under siege as the UK supply market adapts to political interventions and to new competitive and technological threats.’

Hutchinson has a ‘hold’ rating and a 250p target price on Centrica. (WC)

BANKS

Banking faces huge political risk in the run-up to May’s general election. The worst case scenario for the sector is probably Labour leader Ed Miliband taking up residence in Number 10.

The party published its Plan for Banking Reform in February, which outlines the intention to raise an existing levy on bank assets and introduce a bonus tax.

Other proposals include strengthening existing plans to ring-fence banks’ retail operations from investment banking divisions and the Treasury taking control of setting the leverage ratio - a bank’s minimum reserves compared to its risk weighted-assets - instead of the Bank of England’s Financial Policy Committee.

With little separating Labour and the Conservatives in the opinion polls a hung parliament looks likely, which could mean five more years of a coalition government. This is creating uncertainty.

A surge in the polls pointing towards a Conservative victory would ease any fears investors have over more of a bank’s profits being lost to the Treasury.

The Conservatives have not announced any new banking policies. But fighting the European Union’s move to cap bonuses shows the party is behind the industry’s efforts to retain talented staff and grow its profits.

Banking is a key economic industry. The economy fell into two recessions and narrowly avoided a third when many of the country’s largest lenders made huge losses or ran out of cash.

The banking levy was introduced by the coalition to replace the existing bonus tax. The levy is set to raise a specific sum. Early last year the rate was set at 0.156% of a bank’s of risk-weighted assets to meet the coalition’s target of raising £2.7 billion from the industry. The coalition wants £2.9 billion in the next financial year.

Labour says it would increase the levy to get more than £3 billion out of the industry a year. A specific bonus tax would also be re-introduced.

The levy cost Lloyds (LLOY) and Royal Bank of Scotland (RBS) around £200 million each last year. Their bills could rise by £80 million annually under a Labour government, according to analysts at RBC Capital Markets. It forecasts that Barclays (BARC) will pay £560 million, up from £462 million in 2014. HSBC could be charged some $1.5 billion this year, up from $1.1 billion in 2014, according to analysts’ estimates. Troubled Standard Chartered (STAN) could pay some $100 million more than it did in 2014 to $370 million. (MD)

HSBC (HSBA) 558p

Global banking giant HSBC is already on the receiving end of a public backlash against activities in its Swiss private banking unit and that could intensify in the coming months.

Respected fund manager Neil Woodford sold the stock in 2014 because of concerns over what he termed ‘fine inflation’ in the banking system.

But analysts at broker Killik reckon there is a case for investors to look through the gloom because of its positioning in emerging markets and have a ‘buy’ rating on the stock.

‘It is one of the few truly global banks, both for corporate and individual customers,’ they say. (WC)

LIFE INSURERS

Life insurers serving affluent customers look set to be the industry’s losers whoever is elected into Number 10 on 7 May.

All the main parties vying for power are expected to reduce the rate of tax relief on pension contributions, with those earning more than £150,000 a year hit hardest.

Such a move will be made to bring more money into the public purse.

Savers can put up to £40,000 a year into a pension, with tax relief on contributions tracking income tax rates. This is 20% for basic tax payers, 40% for those in the second band and 45% for those earning more than £150,000 a year. There are 4.4 million people in the highest tax band, according to RBC Capital Markets.

The size of the reduction, however, depends on who wins the election. A deeper cut is expected if Labour or the Liberal Democrats take power.

If Labour is elected they have said tax relief for those making more than £150,000 a year will be cut to 20%. The current £1.25 million lifetime allowance will be reduced to £1 million, while the annual allowance will shrink 25% to £30,000.

The pension minister, a Liberal Democrat, has proposed a flat 33% tax relief rate.

The Conservatives have made pensions a key election battleground. They have revolutionised the industry by altering the rules on how retirees can invest their pension pot by abolishing the compulsory buying of an annuity. They have stated that they want to reward those who save for their retirement and not expect the State to step in.

Tax relief encourages people to put more of their wealth away to pay for their retirement. While the proposed 33% rate, for example, could see pensions become more attractive to lower earners, the reverse could be true for higher tax payers.

Labour has been against the Coalition’s pension rule changes, so they could make changes if they win the election, which could see a rise in demand for annuities. Specialist providers Just Retirement (JRG) and Partnership Assurance (PA.) could experience share price gains on any such rule reversal. Keep in mind that Labour has not stated that it will reverse this rule change. (MD)

St James’s Place (STJ) 940p

St. James’s Place (STJ) is one life insurer that is likely to see higher tax rates on pensions hit its business.

It has significant exposure to the UK pensions market and its clients tend to be in the mass affluent wealth management category.

But there is more to its business than pensions, and any decline in that market may provide opportunities for St James’s to invest client money outside of pension wrappers.

The business represents ‘growth at a reasonable’ price, according to David McCann, an analyst at Numis, so any election panic selling might provide an opportunity to snap up shares. McCann has an ‘add’ rating and a £10.00 target price. (MD)

HOUSEBUILDERS

One of the overarching concerns of voters ahead of this general election - particularly in the increasingly-unaffordable south east - is how an incoming government proposes to deal with the perceived housing shortage.

On this issue, it appears that - rhetoric aside - both the major parties are in agreement about the need to build more affordable housing while at the same time providing access to sufficient credit to actually enable punters to buy the homes on sale.

The Conservatives have already made it clear that their Help to Buy scheme will be extended out to 2020 and it’s very unlikely that a putative Labour-led government would withdraw the programme.

Labour, it appears, is more focused on policies like offering to build double the 100,000 homes promised by the Tories. In addition to this, Labour intends to ‘unblock the supply of new homes’ by giving local authorities ‘use it or lose it’ powers.

This is designed to prevent developers ‘land-banking’ areas with planning permission and instead force their hand to build. Investors should expect some short-term turbulence in this sector ahead of the election.

TELFORD HOMES (TEF:AIM) 371p

We like London housing specialist Telford Homes.

The market outlook for the low and mid-market housing market segment it operates in - particularly in the south east - is reasonably positive and the Waltham Cross-based business has an impressive order pipeline of £1.1 billion.

Analyst Mark Gibbon at broker N+1 Singer is ‘confident that the housing market is still robust and that Telford Homes is well-positioned within it. Rated broadly in line with its peers, Telford’s consensus 2-year EPS growth rate (24.5% annualised) is somewhat higher than average.’ (SFl)

INFRASTRUCTURE

Underinvestment in infrastructure since the start of the financial crisis in 2007 means there is plenty of scope for new projects in the years ahead.

Austerity remains a watchword and grand election promises on this front have been notably absent. A kind of bland ecumenism exists with both parties to a large extent adhering to the orthodoxy of the 2014 National Infrastructure Plan (NIP).

Infrastructure does remain a major priority for both of the major parties and the NIP is at the heart of this, having enabled the government to establish long-term funding certainty for the key areas where infrastructure is publicly funded such as roads, rail, flood defences and science.

All of the publicly funded elements of the infrastructure pipeline now represent a firm and specific government commitment. Headline commitments include a £15 billion of investment in the Strategic Road Network as part of a new Road Investment Strategy.

This will include the undertaking of over 100 major schemes to 2020-21, including transformational projects for the A303 and A1 north of Newcastle.

The NIP also envisages a £2.3 billion programme of flood investment investing in over 1,400 schemes to protect at least 300,000 homes; underpinned by a detailed pipeline of individual schemes including at Oxford, Lowestoft, Yalding, River Thames and the Humber. Another headline scheme in the NIP is the £38 billion Network Rail delivery programme, including electrification of key lines, as well as commitments to transformational projects such as Crossrail, phase 1 (due to complete in 2018), and High Speed 2 (HS2), phase 1 of which is due to start construction in 2017.

In the construction segment, we remain fans of Kier (See Plays Update, 5 Mar ‘15) and Keller (KLR) (See Plays Update, 19 Feb ‘15). (SFl)

Hill & Smith (HILS) 662p

Investing heavily in its road infrastructure assets, Hill & Smith looks a likely beneficiary of future road-building plans in the UK.

Speaking to Shares, chief executive Derek Muir says Hill & Smith’s ‘sweet spot’ is the rental of temporary road barriers during construction work and also the production of permanent barriers.

Full-year results released on 10 March show earnings per share (EPS) was 44p, up 11%. EPS is forecast to hit 48.1p next year, according to Numis analyst David Larkham, and 50.3p the year after.

‘The renaissance of the UK road programme supported by the certainty which the UK Infrastructure Bill brings is positive for H&S,’ writes Larkham. (WC)

YOUR COUNTRY NEEDS YOU

Pollster YouGov (YOU:AIM) will be front and centre ahead of 7 May as newspapers, politicians and political blogs try to call the most open general election in a generation.

The quality of the group’s earnings is increasing but once you look beyond the hype we think the rating may be starting to lose touch with reality. Based on Peel Hunt’s forecast July 2015 earnings per share of 5.8p the stock is on a price-to-earnings ratio of 21.1. The fact the valuation is looking full is only likely to be recognised by the market once May’s poll is out of the way.

Since the 2010 general election the shares have seen a significant re-rating - up 174% in the best part of five years - and this has not been built on fresh air. With an online panel of more than 2.5 million respondents spanning upwards of 11 countries the group increasingly derives its revenues from the Data Products and Services (DP&S) division - dominated by its Brand Index and Omnibus products.

Brand Index tracks the public perception of global brands on a daily basis allowing companies to keep a close eye on their brand’s health and act fast on any changes in perception. Omnibus is a vehicle allowing organisations like PR agencies, advertisers and charities to find out about people’s opinions, attitudes and behaviours. DP&S accounted for 29% of July 2014 revenues - up from 24% a year earlier - and half of operating profit. This reflects the higher margin nature of this business compared with more traditional one-off polls and market research.

Changing profile

DP&S commands a margin of 28% versus custom research at 11% and is repeatable business to boot. YouGov Profiles, a new media planning and audience segmentation tool for brands and their agencies, was launched in November 2014. It generated plenty of media attention as it allowed anyone to go online and identify, for example, the typical Arsenal fan based on its panel.

A first-half trading update (6 Feb) suggested maiden sales of YouGov Profiles had already been achieved and noted the wider business was performing in line with 2010 election expectations.

The group now has the infrastructure in place to roll out its business into new territories and extended its geographic footprint into the Asia Pacific region with the acquisition of Hong Kong, Shanghai and Singapore-based Decision Fuel in January 2014. A possible avenue of growth is further expansion in the US - a huge potential market which the company has only begun to exploit.

Clearly the brand has its own inherent value and the company will receive plenty of free publicity as the election campaign enters its final weeks. There is the risk of brand damage if YouGov fails to call an extremely complex election landscape correctly and the stock fell 10%+ in the month following the last two significant national polls: namely the 2010 election and the 2014 independence referendum in Scotland.

At 122.25p it seems unwise to back against YouGov heading into a close national poll but it may pay to be agile once election fever has died down. (TS)