By Josephine Mason and Helen Reid
LONDON (Reuters) - British utility stocks are trading at a growing discount to euro zone peers as investors fear the country's deepening political crisis could trigger a general election that ushers in renationalisation of the industry, worth $76 billion (£59.9 billion).
The opposition Labour Party has said it wants to nationalise energy and water infrastructure if it can oust Prime Minister Theresa May's Conservatives from power, reversing decades of pro-privatisation policies.
A national election is not due until 2022, but a rift in the Conservative party over Britain's exit from the European Union has raised the chances the country will go to the polls early.
That has investors fretting about a potential victory for Labour, led by left-winger Jeremy Corbyn.
Simon Webber, lead portfolio manager on the global and international equities team at Schroders said those fears were "another overhang" for utilities, already subject to a discount like other UK assets because of Brexit uncertainty.
"When you have a very different policy environment, the market struggles with that," he said.
Historically, the UK sector has been priced at a hefty premium to similar companies in the euro zone, due in part to its fat dividend payments.
That disappeared two years ago as UK assets in general were shunned by investors worried about damage from Brexit to the world's fifth-biggest economy and discouraged by persistent uncertainty about the terms of Britain's departure from the EU.
The gap between the two sectors has widened significantly since the middle of March as it became clear a Brexit deal by the original March 29 deadline was unlikely.
Price-to-earnings valuations have been sliding this year and UK utilities now trade on an 8.6% discount to euro zone utilities, nearing the discount of 13.7% -- a 10-year high -- hit in March last year.
That low came just after the UK government introduced a new law capping energy bills as a cold snap dubbed "the Beast from the East" pummelled the country, triggering a big jump in demand and supply shortages.
(Graphic - UK utilities discount to Euro Zone May 22, https://tmsnrt.rs/2EkbmKj )
Adjusting for the drop in the value of sterling against the euro, the UK index has fallen almost 10% since mid-March, compared with a 1.7% rise in euro-zone utilities.
That lagging performance, even as investors have flocked to sectors like gas, water and electricity companies for their defensive qualities, underlines their worries.
The selling has wiped 8 billion pounds off the market capitalisation of the sector, taking it to 59.1 billion pounds.
"The UK financial market has begun to price in the possibility of a change of government," said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.
"However it's much more difficult to go into details about what it would involve."
(Graphic - Utilities, https://tmsnrt.rs/2WhLjh6 )
(Reporting by Josephine Mason and Helen Reid; Editing by Catherine Evans)