The City is growing increasingly concerned about the probability of a Jeremy Corbyn-led government taking power as early as this year.
Analysts at Keefe, Bruyette & Woods conclude that the chances of the Government collapsing after failing to win support for a Brexit deal have jumped, which could lead to a snap election and Labour victory.
KBW notes some 40-80 Conservative MPs are positioned against the Government’s so-called Chequers agreement on Brexit, making a vote of no confidence in Theresa May likely.
The bank calculates there’s now nearly a third (31pc) chance of Labour sweeping to power this year, deeming it “highly improbable” the Conservatives would maintain a majority in another election. They ascribe a 6pc chance to a ‘no deal’ Brexit outcome.
The most likely outcome is a delay to negotiations with Brussels at 50pc, KBW believes, higher than the probability of reaching an agreement on time (11pc).
The UK ultimately staying in the EU is thought to be the most unlikely scenario, at a slim 2pc.
KBW recommends buying stock in Asia-focussed banks HSBC and Standard Chartered, which are less exposed to any potential domestic economic fallout.
By the same logic, KBW urges investors to ditch some challenger banks it believes could be hit worst if the UK economy or housing market turn south, including FTSE 250 challengers OneSavings Bank and Charter Court.
“It is difficult to see how the impending Brexit chaos will have anything but a negative impact on UK-centred banks,” KBW analyst Edward Firth commented.
KBW is also wary of taxpayer-controlled RBS. Labour’s last manifesto pledged to consult on breaking up RBS into regional banks and to direct its lending to small businesses.
However it maintained a buy recommendation due to RBS’s improving general financial performance.
Last week RBS chairman Sir Howard Davies’ called Labour’s past proposal to break-up the bank “genuinely alarming”.