Tomorrow, the Chancellor Rishi Sunak will be delivering his long awaited Spending Review. Defence has already been given £16.5bn of funding, which could benefit defence groups such as BAE Systems and Babcock.
The Spending Review is likely to focus on spending to help with the economic recovery from Covid-19. This may create investment opportunities in certain sectors. For example, infrastructure. It could reasonably be expected that infrastructure will feature prominently. That could benefit a company like Morgan Sindall.
With UK shares recovering on the back of positive Covid vaccine news, the Spending Review, if well-received by investors, could provide the market with another boost. With this in mind, these are the shares I’m tempted to potentially buy today ahead of the review.
Potential Spending Review winners
Infrastructure is an area of the economy I think is likely to be boosted. The UK government is keen on the idea of levelling up regions and will very likely want to invest to help the economy. HS2 and Heathrow expansion are both examples of large infrastructure projects in the works. I think more investment in northern transport and roads could be announced.
Morgan Sindall could do particularly well. Earlier this month it issued a very positive update. It’s performing well – even without a further potential boost from the Spending Review. The recovery means the construction and regeneration group could reinstate its dividend.
If I want to pick a company more focused on infrastructure, then Hill & Smith could also be a good option. Road safety barriers are part of its business, demand for that product could pick up if there is increased public spending on roads.
The current government, much like its Conservative predecessors, has been very keen to support the housebuilding industry. Could the Spending Review extend more support to the industry? Perhaps. Even if it doesn’t though, the UK housebuilders are relatively cheap, highly profitable and already have government support in the form of Help to Buy and the Stamp Duty cut.
Barratt Developments is well placed to take advantage of any further government support. It has a lot of cash, strong return on capital employed and is developing its land bank. I’d happily buy its shares, even if though I already hold shares in fellow FTSE 100 housebuilder Persimmon.
Sectors I’ll continue to avoid
I’d largely continue to stay away from hospitality and retail shares, as well as REITs. I think shares in these sectors all face challenges that I doubt the Chancellor will be able to fix. These sectors, which seem to be very cheap, may get a boost from the Spending Review, but I feel any upside will be short-lived. In the case of retail and REITs, they faced structural issues even pre-Covid. For me, that makes them sectors to avoid.