The prospect of lasting political turmoil caused by a hung parliament is unnerving investors and policies held by both the Conservatives and Labour are expected to be negative for UK equities to some degree.

The Tories have pledged to hold a referendum on Britain’s membership of the European Union by 2017 and a so-called “Brexit” would be particularly damaging for financial services, especially fund managers. Leaving Europe would have “severe” implications for the asset managers, HSBC analysts have warned, as they would be outside the EU Ucits directive and so would find it difficult to sell retail funds.

Given that financial stocks such as Aberdeen Asset Management, Schroders and Standard Life account for more than a fifth of the FTSE 100, an EU referendum therefore poses significant risk to the index, belying the widely-held belief that the blue-chip gauge is immune to domestic politics because it is dominated by international companies.

Labour, meanwhile, has proposed cracking down on gambling companies and energy suppliers and is expected to take a tougher stance towards banks and re-regulate bus services, which would shake shares across the gaming, utility, financial and transport sectors.

The more domestically-focused mid-cap FTSE 250 index, home of gambling companies such as William Hill and transport businesses like FirstGroup, looks particularly vulnerable. The index is up 7.4pc at 17,268.83 since the beginning of the year.

More broadly, Labour’s pledge to hike corporation tax, which has been cut by the Coalition, is also a worry, said Mr Brazier, of Investec. “The thing that I think this coalition government will be remembered for in 10 years’ time is not what they did with the deficit and spending, but what they did to corporation tax.

“The fastest growing part of UK GDP is UK business investment. I’m hearing it loud and clear when I am meeting companies – they are very concerned about a Labour-led minority, majority or coalition government and what that means in terms of tax rates and business investment.”

Centrica, down 9.3pc at 253.2p since the start of the year, and SSE, off 7pc at £15.08, are the two FTSE 100 stocks most exposed to Labour leader Ed Miliband’s promise to tackle energy costs, with both stocks rattled last month by his pledge to hand energy regulator Ofgem powers to cut prices.

Tumbling oil prices have added to pressure on both companies, while oil and gas explorers, which were hit hard when Brent crude more than halved last year from its peak of $115 a barrel, have also remained hamstrung by the commodity’s continued weakness in 2015.

Royal Dutch Shell’s “B” share has lost 4.8pc to £21.26½ and BG Group is down 1.4pc at 852.9p. BP, which slumped 15.8pc in 2014 as crude prices plunged, has risen 7.8pc to 442.85p so far this year, buoyed by speculation that the low oil price environment leaves it vulnerable to a takeover.

Spiralling metals prices such as iron ore, which last week dropped below $50 a tonne for the first time in a decade, have also dragged on mining shares. Anglo American is 17pc lower at 997p – making if the worst-performing FTSE 100 share, Glencore 6pc weaker at 280¾p and Antofagasta down 4.6pc at 718p.

Last year, plunging oil and mining stocks were joined at the bottom of the blue-chip leader-board by Tesco, which suffered the second-heaviest fall in the FTSE 100 after the grocer was hit by a string of profit warnings and the discovery of a £263m black hole in its accounts.

But while commodity shares have by and large remained weak since the start of January, Tesco has enjoyed a reversal and climbed 29.3pc to 244.3p, making it the biggest riser in the FTSE 100. Dave Lewis, Tesco’s new boss, has been the driving force behind the rally, said Shore Capital analyst Clive Black.

Staff morale has improved since his arrival, there has been “a gradual improvement in the in-store experience” for customers that has resulted in recovering sales figures, and Mr Lewis has started to change the supply chain to “materially simplify the business”, the analyst said.

“There remains an awful lot to do, though, such was the malaise at Tesco,” Mr Black cautioned. “But we’re seeing demonstrable progress and we’re much more confident that there is a more favourable outcome coming for investors.”

Still, while the nascent recovery at Britain’s biggest retailer may be drawing fund managers’ attention, with the election just weeks away, shares in other consumer stocks might soon be shunned.

“If you look at election cycles since the Eighties, consumer confidence tends to peak just before an election and then declines over the next two years,” said Dennis Jose, an equity strategist at Barclays.

“Domestic-focused stocks are likely to underperform heading into the election because of all the uncertainties involved.”

Source The Telegraph Investor