As spending cuts gather pace in Western Europe, policy decisions over where the axe falls are becoming a key driver of individual stock prices — the latest shift in how politics impact markets.

Until recently, developed world markets were seen as having advanced beyond the stage when they might be vulnerable to political risk in the same manner as emerging economies.

The financial crisis shattered that assumption, perhaps forever, but the way in which politics has acted as a market driver has evolved over that time.

In Europe, the shift from stimulus to spending cuts has changed the market impact. For most of the last year, investors have been watching national politics and aggressively discriminating between countries, fearful a sovereign default or major banking failure could spark another new slump.

That meant politics has grown steadily as a driver both of broad market sentiment and particularly sovereign debt yields.

Now — with perhaps more clarity on how nations approach the crisis and how much support will be available to troubled sovereigns and banks — investors are looking deeper into how political decision-making will hit individual stocks.

"There is now less of a focus on the Armageddon-type risk and so people are looking down more once again at individual company stories," said Morgan Stanley European equity strategist Graham Secker.

"For most of the last 25 to 30 years, you haven't really had to look at politics when it comes to assessing equities. That's all changed now. It's the new world in which we are living."

For much of the crisis, political decision-making has been a key driver of banking shares as investors looked to see trends in regulation and bailouts. But now that is broadening.

The heightened focus on lower level-policy-making has become central to price moves in other sectors exposed to government spending such as infrastructure, defense and outsourcing.

"The pie is going to be smaller than it has been and people want to pick winners and losers," said Jon Levy, Europe analyst at risk consultancy Eurasia Group. "That means looking at political decision-making at a much more micro level."

For much of the past decade — and particularly during the early years of the crisis — firms and their investors saw the revenue they received from public sector contracts as the safe part of their balance sheet. Now, that has changed.

"The problem for a lot of these firms is the uncertainty over precisely where these cuts will hit and that will likely hang over the shares until the government clarifies its position," said Jimmy Yates, head of equities at CMC Markets.

Infrastructure shares have broadly underperformed across Europe. Defense firms are also seen losing out -- although it is still far from clear which arms projects will be shelved and which will survive.

Airbus parent EADS will be hoping to avoid serious cancellations to its A400M troop transporter, while other firms including Britain's BAE Systems, Italy's Finmeccanica and U.S.-based Boeing and Lockheed Martin all face their own worries.

The key trick will be picking the right individual stocks. Which companies perform well and badly will depend heavily on how they position themselves in the coming months.

Britain's outsourcing companies are a case in point. Support services firm Serco — with a reputation for being well-connected to local and national government — saw its shares rise 3.1 percent this year, expecting to benefit as official functions are contracted out to save money.

Others have performed less well. IT firm Logica, expected to lose out on government contracts, is flat, outsourcer Capita has lost 5 percent and shares in social housing firm Connaught have tumbled 96 percent.

Some firms admit they were taken aback.

"We didn't anticipate how severe and how final the cuts would be," said a spokeswoman for IT firm RM, which provides computers for schools and has written off 1.5 million pounds after making consultants redundant as a result of cuts that went further than it had feared.

Unsurprisingly, companies, interest groups, charities, government bodies and other interested parties are all now maneuvering furiously to argue they should be spared the knife and that the real savings should be made elsewhere.

Drilling down to get details of cuts is far from easy. To get clarity on which companies were most exposed to the freezing of Britain's 55-billion-pound ($86 billion) school building program, Reuters had to contact 26 local authorities individually.

In many sectors, decisions have simply not been made yet.

"It's a matter of watching closely, looking at government budget decisions and listening to what the companies say," said Morgan Stanley's Secker.

Most analysts expect Europe's austerity drive to last several years, but with the greatest price volatility for affected firms likely in the coming months as clarity emerges.

So far, this dynamic seems largely limited to Europe -- not least because the United States has yet to begin cuts and is still using public spending to stimulate its economy. But that too is seen shifting in the years to come.

"In the long term, the U.S. is also going to have to look at deficit reduction," said Eurasia's Levy. "That is going to have a similar impact on companies there, particularly in sectors like defense."