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* Years of falling wages pressure politicians to act
* UK utilities seen most at risk from politics
* European telecoms to benefit from EU regulation
By Toni Vorobyova
LONDON, Dec 2 (Reuters) - Political intervention andregulation are becoming increasingly important in shaping theviews of European equity investors, prompting some to ditchbanks and utilities and creating opportunities in transport andtelecom stocks.
Four years of falling or flat real wages in Europe,stretched state finances and a desire by authorities to step upregulation to avoid a repeat of the financial crisis have ledgovernments to exert more influence in corporate affairs.
Banks are being urged to boost capital, reducing theirability to reward shareholders through dividends.
Utilities, particularly in Britain, are under pressure frompoliticians to cut costs for consumers, which will leave thecompanies with lower profits and less cash for investment.
Investors are thus paying more attention to what authoritiesare doing, prompting both Citi and HSBC to pick regulation as akey European equity investment theme for 2014.
British utilities are seen as among the most exposed, facingwidespread public discontent over rising fuel bills against thebackground of an often uneasy coalition government and aparliamentary election in 2015.
In the two months since the opposition Labour Party proposedfreezing energy prices until 2017 if it wins power, the ThomsonReuters UK Utilities Index has dropped 7.4 percent, strongly underperforming a broadly steady FTSE100.
Over the weekend, Prime Minister David Cameron respondedwith his own plan to clamp down on energy costs, promptinganalysts to forecast lower earnings for the likes of SSE and Centrica.
POLITICAL ELEMENT
"There is always a political element at the best of times,but it's become more acute now that we've had some years ofnegative real wages in the UK and the recent energy billincreases have thrown this into to focus," said Michael Clark,portfolio manager at Fidelity, who said he might reduce holdingsin energy companies.
"From an investment point of view, I don't know which waythings are going to go in terms of who wins the election in2015, but we should be a little bit careful of expecting toomuch from these companies because of the political pressure."
In the past 90 days, top analysts have cut dividendforecasts for FTSE 100 utilities - including SSE, Centrica andSevern Trent - by 0.4 percent for next year and 1.5percent the year after, according to StarMine SmartEstimates.
Foreign players may also be affected, with Germany's RWE, last week scrapping plans to build the world'slargest offshore wind farm in British waters amid uncertaintyover government renewable energy subsidies.
Indeed, RWE and peer E.ON show the possibleimpact of policy on the sector, with a state-ordered exit fromnuclear power and competition from green energy sources leavingthem less cash for investments and dividends.
Spanish utilities also face problems after the financeministry withdrew 3.6 billion euros ($4.9 billion) in financingfor the electricity sector over the weekend, choosing to focuson reducing the government deficit but in so doing raising costsfor indebted companies.
Iberdrola and Endesa shares fell 2.2percent on Monday, while Gas Natural lost 1 percent.
HOLDINGS REDUCED
Colin Morton, portfolio manager at Franklin Templeton,meanwhile, has already reduced his holdings, taking about 2percent of his money out of UK utilities.
"I still like the companies but unfortunately their fortuneshave been hijacked ... The problem is that we are going to nowbe watching things like opinion polls like a hawk for the next12 to 18 months," he said.
"It would make me nervous of UK banks because a lot ofpeople own shares like Lloyds because they think theyare going to start returning a lot of money to shareholders, andunder a Labour government I think that's not very likely."
Lloyds is expected to start paying cash to shareholders nextyear, when StarMine SmartEstimates forecasts a dividend of 2.9percent, rising to 5.0 percent the following year to overtakethe FTSE 100's forecast average yield of 4.2 percent.
The pressure on dividends could spread across Europe, wherethe European Central Bank's Asset Quality Review, stress testsand the prospect of more regulation will put the spotlight onbalance sheets and capital ratios.
"If regulators tighten rules on aggressive distribution ofprofits, we would highlight SEB and Handelsbanken as being vulnerable," HSBC said in a note.
SEB and Handelsbanken both offer a dividend yield of 3.5percent, above the 2.5 percent average for STOXX Europe 600banks, according to StarMine.
Politics, though, can create winners as well as losers, withtelecoms expected to benefit from the European Union's drive tooverhaul the sector, including by encouraging investment inbroadband network infrastructure.
Here, winners could include Vodafone and DeutscheTelekom, according to HSBC.
Back in Britain, some transport companies such as bus andrail operator Go-Ahead could benefit from a new approachto rail franchising. The new policy, which seeks to restoreconfidence in the privatised network after costly errors in thebidding process, includes staggering the award of franchises andis expected to improve profits and reduce risks.
"Go-Ahead Group is the stock most exposed to rail franchisewins, in our view. These could drive upgrades to consensusearnings of 20-30 percent," HSBC analysts wrote.
"Importantly, they (the franchises) look set to be awardedon better terms than they previously were, meaning that theimpact on share prices could be amplified further still."
