An Equity Guide to Labour Shock: Corbyn's Winners and Losers

(Bloomberg) -- Nearly a year after Brexit, one could be forgiven for fearing another political surprise in this week's U.K. general election. And even as polls have tightened in the week ahead of Thursday's vote, a Labour majority would still stun financial markets.

While Prime Minister Theresa May is leading a campaign that's less business-friendly than past Tory candidates', Jeremy Corbyn has pulled his party leftward, with promises to nationalize railways and raise wages and taxes. At the same time, unlike the Tories, Labour has vowed to retain the benefits of the EU single market -- a desire shared by most companies and investors.

In the final days before the election, May and Corbyn have traded blows over each other's records on countering terrorism, as recent attacks in London and Manchester turned the focus from Brexit to security. Polls have called for increasingly narrow margins for the Tories amid a series of political missteps by May, with the latest one by Survation/GMB ended Saturday showing just a one-percentage point lead.

Equity markets have a lot on the line: The FTSE 100 rallied to an intraday record high last week as perceived certainty over the vote's outcome helped shift the focus to Europe's economic recovery and solid earnings.

“More dramatic swings might be expected in the event of an unlikely Labour victory, but Brexit would continue to cast a pall,” Alastair Gunn and Rhys Petheram, fund managers at Jupiter Asset Management, wrote in a note.

Here are the sectors and stocks to look out for in case of a Labour upset:

LOSERS 

Domestic Companies

In addition to higher political uncertainty, a Labour comeback is expected to push down sterling, making imports more expensive for domestic producers and squeezing consumption -- which is why U.K. mid-caps tend to underperform when the pound is weak.

With Labour proposing to raise the minimum wage and strengthen workers' bargaining power, companies with a large local staff -- transport players such as IAG SA , EasyJet Plc and Interserve Plc, as well as retailers such as Next Plc and J Sainsbury Plc -- will take a hit, JPMorgan Chase & Co. strategists led by Mislav Matejka wrote in a note. 

Nationalization Targets: Royal Mail, Railways 

Corbyn has pledged to re-nationalize Royal Mail Plc, as well as rail companies when the franchises expire. This could spell trouble for FirstGroup Plc and National Express Group Plc, which offer transit services, according to JPMorgan.

Financial Industry, Especially RBS 

Unsurprisingly, the populist Corbyn is no fan of big banks. He's vowed to separate investment and retail banking and extend the Stamp Duty Reserve Tax to a wider range of assets. One particular stock to watch is Royal Bank of Scotland Plc: the Labour Party said it will launch a consultation on breaking up the lender to create new local public banks.

Defense 

When asked about his position on Trident, Britain's nuclear weapon system, Corbyn has equivocated -- though his party's manifesto endorses renewal after his opposition was overruled in a party vote. Not renewing the system could potentially remove a large stream of business for BAE Systems Plc, said Sandy Morris, an analyst at Jefferies LLC.

M&A 

Both major parties are calling for greater scrutiny of takeovers, with Labour vowing to make sure critical companies have a clear plan to protect workers and pensioners in case of a merger. Thomas Seidl, an analyst at Sanford C. Bernstein, warned it would be negative for U.K. equities, and would “strip out any remaining M&A premium on the stocks.” 

Utilities

Higher power bills are another target that have united May and Corbyn, but according to Citigroup Inc., the latter's plan is even harsher for utilities. The Labour Party has proposed an immediate 1,000-pound ($1,293) cap on average household energy bills annually before transitioning to a fairer system, as well as creating public energy and water companies and regaining control of energy supply networks. 

Pennon Group Plc, Severn Trent Plc, SSE Plc and Centrica Plc are among companies that may be hurt, JPMorgan said. U.K.-focused utilities have already slid after the Tories also pledged to cap energy costs, before recovering amid a lack of clarity. Companies including Centrica, SSE and National Grid will plunge at least 10 percent in the case of a Labour-led government, Deutsche Bank AG said in a Tuesday report.

WINNERS 

Exporters and Global Corporations

While the stock market may take a hit amid the initial shock, the FTSE 100's resilience after Brexit shows there's a silver lining in currency weakness. A drop in sterling makes exports more competitive and boosts overseas earnings in pound terms.

Click here for a guide to understanding U.K. election polls.

Of course, Brexit is still the dominant issue for the campaign -- and for most U.K. companies. With the Tories outright backing an exit from the single market in their manifesto, some analysts say a weakening of the party may help pave the way for a better deal with the EU. A smaller Tory majority or even a Labour-led government may actually be better for risk assets in the medium term, according to Morgan Stanley.

“Better checks and balances against a hard Brexit could be possible” in case of a hung parliament, Ken Odeluga, a market analyst at brokerage City Index wrote in a note. “If Labour wins, a softer Brexit would still be likelier, and the market has made plain that it prefers soft to hard.”

To contact the reporter on this story: Justina Lee in London at jlee1489@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Namitha Jagadeesh