(Bloomberg) -- With the UK election now set, investors are weighing up the possible implications of a new government and looking for ways to trade it. 

While the consensus is that a Labor landslide as polls suggest is already priced into markets, Jefferies strategist Mark Braley said UK homebuilder and utilities shares would be among the industries most sensitive if Labour rolls out more expansive economic policies. The FTSE 250 Index of smaller, more domestically focused stocks tends to beat the more international FTSE 100 Index following Labour victories, wrote Citigroup Inc. 

“The chaos of the last five years will come to an end,” said Susana Cruz, a strategist at Liberum Capital Ltd. “I think the plans of the new government, most likely Labour, will target what businesses are looking for, which is stability. But in term of incentives, spending and tax cuts, we don’t see a lot of room.” 

Of course, a Labour victory is no certainty and there’s plenty of time for polls to change. A Tory revival would be a boost for UK lenders, such as Lloyds Banking Group Plc and NatWest Group Plc, wrote Jefferies’ Braley. And worries about a hung parliament could be negative for banks, homebuilders and retail companies, he added. 

Read: For the UK Equity Market, ‘The Time Is Now’: Taking Stock

UK indexes have rallied in recent weeks, helped by soaring copper and gold prices, as well as a rotation to cheaper, more defensive shares. The FTSE 100 and FTSE 250 are up about 9% since the end of February, double the returns of the S&P 500 and the Euro Stoxx 50.

So far, markets have reacted with calm to the prospect of a July vote, with some strategists pointing out that unlike previous elections, there’s not a lot of difference between Tory and Labour policies. Seismic shifts, like Brexit or a Scottish referendum, are unlikely this time around, and neither party is promising a radical change, wrote ING Bank strategists. 

The “election may generate noise, not direction” in currency markets, they wrote. The bigger issue for UK investors is the possibility for interest rate cuts this year, ING said. 

At Citigroup, strategist Beata Manthey said she still prefers European stocks over those from the UK, citing the country’s persistent economic weakness. “Fiscal policy differences will likely be small between parties, meaning the inflation trajectory will matter most for UK rates,” she wrote.

Defensive and financial stocks tend to fare the best after elections, according to Citigroup’s analysis. They calculate that UK equities have been historically flat to down in the six months after a vote elections, but up about 6% after a Labour victory. 

HSBC Holdings Plc is bullish on UK stocks, but predicted the election reaction will likely be muted. Strategist Edward Stanford raised his rating on the FTSE 100 this year on the back of cheap valuations and higher commodity prices boosting UK mining shares. 

“With public sentiment so depressed, it would not take much for optimism to return,” he said. 

--With assistance from Michael Msika.

©2024 Bloomberg L.P.