GRAPHIC-UK-exposed stocks outperform despite election uncertainty

(Repeats without changes from Tuesday)

* Reuters basket of UK exposed stocks outperforms FTSE 100

* Investors expect improving growth to offset election effect

* Fund managers hold cash, to stay flexible around vote

* TAKE A LOOK: Britain's general election:

By Alistair Smout

LONDON, March 24 (Reuters) - Undaunted by Britain's deepest political uncertainty in a generation, stock investors are opting for firms active in the domestic economy over London-listed international groups.

The FTSE 100 index has hit record highs even though opinion polls suggest a general election on May 7 is unlikely to produce any clear winner or obvious coalition, with fund managers focusing for the moment on the improving British economy rather than the risk of parliamentary paralysis.

As a result, businesses that earn the majority of their revenue from the British market are outperforming more internationally-active groups in sectors such as energy and mining whose fortunes depend more on global commodity prices.

A Reuters basket of 34 London-listed blue chips which make at least half their revenue in Britain is up 8.6 percent this year, compared with a 7.2 percent gain for the blue-chip FTSE 100.

All the stocks are in the FTSE 100 except betting group William Hill (Other OTC: WIMHF - news) , which was relegated last year. When weighted by the proportion of revenue each component stock derives from Britain, the basket's performance is even better, up 9 percent this year.

Companies in the next tier are likewise doing well. Mid-cap stocks in the FTSE 250 index, which are also sensitive to the British economy, have gained 9.1 percent this year.

"We're a little bit underweight large cap and a little bit overweight small and mid-cap stocks," said Guy Ellison, head of UK equities at Investec Wealth & Investment. "We're acutely aware of the impending election... but the election doesn't change our view enough to make a material change at this stage."

GRAPHIC - UK-exposed stock performance vs FTSE 100, FTSE 250: http://link.reuters.com/gef44w

HUNG PARLIAMENT

The last election in 2010 produced a hung parliament but the Conservatives and Liberal Democrats formed a coalition in just five days. Since then, support for the Lib Dems has dived, increasing the likelihood of a weak coalition or a minority government, meaning another election might be necessary to try to break the deadlock.

Most opinion polls suggest the Scottish National Party will win the lion's share of Scotland's 59 Westminster seats on May 7. This could make it the third largest group in the 650-seat British parliament, handing the balance of power to a party which campaigned for Scottish independence in last year's referendum.

While the FTSE 100's relatively high international exposure insulates it from in the British economy to a degree, the data shows that the UK exposure has been a help, not a hindrance.

Having traded roughly in line with the FTSE 100 earlier in the year, the basket has outperformed since the start of March, despite the nearing election. By contrast, stocks with exposure to Scotland suffered last year in the run up to the referendum when Scots eventually voted against independence.

Growth is picking up in the British economy while a drop in inflation to zero and a modest rise in average earnings have helped consumers to regain some of the purchasing power they lost after the financial crisis of 2008.

On the flip-side, international commodity-related stocks have underperformed. Oil and gas shares are 2.2 percent higher for the year, with oil sinking as low as $45 a barrel in January before rebounding, and miners are up just 2.9 percent.

Individual stocks have also fallen, with HSBC, the second biggest stock on the FTSE 100, down 4.9 percent. The bank, which earns just 20 percent of its revenue in Britain, fell due to a scandal at its Swiss private bank.

"Those big hitters in the FTSE 100 are mostly a drag, rather than a benefit, whereas the UK economy is actually the fastest growing in the G7," said Jasper Lawler, market analyst at CMC (Shanghai: 600327.SS - news) Markets. "There's a lot to be said for what's going on inside the UK."

The exception is utilities, which are down 2.9 percent on fears of increased regulation as a result of the vote.

Nevertheless, even fund managers with a positive view on UK-exposed stocks are wary, and taking protection accordingly. Boosting cash holdings is one way of allowing funds to move quickly and seize opportunities that arise around the vote.

"What we have been doing and will continue to do is gradually increase our cash weighting in the fund. We're above 6 percent at the moment and that is quite likely to go up over the next few weeks," Steve Davies, manager of the Jupiter UK Growth Fund, said.

"Because this is so complicated, the market is bound to overreact in certain ways. It's hard to predict how exactly ... but you want to have ammunition in advance of that." (Reporting and graphic by Alistair Smout; editing by David Stamp/Jeremy Gaunt)