These Are The Stocks to Watch as U.K. Heads to the Polls Again

(Bloomberg) — The U.K. is headed to the polls on Dec. 12, bringing banks, utilities and housebuilders into focus for U.K. equity investors. There’s also the small matter of Brexit, as strategists digest what the latest developments mean for sterling and U.K. assets.

In the lead-up to the vote, “both Labour and the Conservatives are expected to come out with pretty punchy views on tax, innovation and public spending, which could have significant implications for both corporates and consumers,” Emma Wall, head of investment analysis at stockbroker Hargreaves Lansdown Plc, said by email.

Banks, utilities, transport and and defense are the sectors with most at stake should there be a change in the balance of power, according to Caroline Simmons, deputy head of UBS Wealth Management’s U.K. Investment Office.

Here’s what to watch as the poll looms.

FTSE 100

Given Labour had made taking no-deal out of the equation a prerequisite of supporting a general election, the risk of a no-deal Brexit has reduced, which is likely to support U.K. risk assets, according to Edward Park, deputy chief investment officer at wealth manager Brooks Macdonald Group Plc.

Should parliament return in December with a mandate for the withdrawal deal brokered by Prime Minister Boris Johnson, “sterling will value the reduced no-deal threat and continue the rally seen in recent weeks,” Park said by email. If that proves the case, then the inverse relationship between the exporter-heavy FTSE 100 and the pound should mean the index underperforms, he said.

Banks

Labour leader Jeremy Corbyn becoming prime minister could be just as damaging to British banks’ profits as the U.K. crashing out of the European Union without a deal.

According to Citigroup Inc. analyst Andrew Coombs, the biggest risk to the U.K. banking sector is snap elections, given the impact on sentiment attached to the possibility of a Labour victory. The party’s “business unfriendly” deficit-financed policies would likely lead to capital outflows from the U.K., he wrote.

U.K. lenders Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc have gained 5.6% and 7.7%, respectively, this month as the risk of a no-deal exit reduced.

Utilities and Transport

Shares of companies that keep Britons warm and bathed have been an excellent indicator of U.K. election risk ever since Labour first vowed to nationalize utilities a few years back. Top of this list are water and electricity utilities, covering the likes of United Utilities Group Plc, Severn Trent Plc, National Grid Plc and SSE Plc.

“While fears of nationalization under Corbyn’s rule have remained subdued with lingering Brexit angst, a renewed Labour leadership campaign could weigh heavily on U.K. utilities,” said Andrew Coury, a strategist at Liberum Capital.

But if the Conservatives are able to regain power in an election, this threat would evaporate and the underperformance of U.K. utilities to their European peers may be reversed. It could be a similar story for other stocks and sectors Labour is said to have targeted for nationalization, including postal-service operator Royal Mail Plc and the companies that run British transport services like FirstGroup Plc and Stagecoach Group Plc.

Housebuilders

The U.K. still suffers from an imbalance between the demand for housing and the volume of new houses being built, so any party campaigning for government would likely have to address this as part of their policy platform.

Liberum expects the housing market to slow in the run-up to the election, but that housebuilder shares may outperform should the Conservatives emerge victorious. It particularly favors smaller companies such as Bellway Plc and Galliford Try Plc, which it says should benefit from better risk appetite and which have more attractive valuations.

Defense

Corbyn has been a vocal opponent of military intervention in the Middle East and has argued for the suspension of arms sales to Saudi Arabia. His anti-war stance could hurt defense suppliers such as BAE Systems Plc, according to Citi, which estimated Aug. 1 that the London-based firm’s stock could fall 20% if Labour came to power.

The U.K.’s Dreadnought nuclear deterrent submarine program — another of BAE’s projects — would also be at risk, Citi analyst Charles Armitage wrote. The level of risk to Dreadnought would be reduced if Labour entered a coalition with the Liberal Democrats, he said. A pact with the Scottish National Party would leave both Dreadnought and the Saudi business vulnerable, Armitage added.

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