How investors are trading the UK as political turmoil rattles markets
British assets have been volatile in recent weeks, as Prime Minister Keir Starmer’s leadership has been called into question and political rival Andy Burnham takes a step closer to challenging his position. Burnham, widely expected to launch a leadership bid that could see Starmer ousted, has been confirmed as a candidate in a by-election that could see him return to parliament — a requirement for him to formally challenge the prime minister as leader of the governing Labour party. U.K. sovereign bonds, known as gilts, have seen volatile trade as Starmer defied lawmakers’ calls for him to quit, which led to a swathe of resignations from his government. The yield on the benchmark 10-year gilt is hovering near a post-2008 high, while longer-maturity bond yields are near their highest levels since the late 1990s. The British pound and London’s FTSE 250 index have also come under pressure in recent weeks. Citi’s UK stocks to watch Despite the political turmoil gripping Westminster, many investors continue to take a bullish view on London-listed equities. In a Monday note, analysts at Citi said they remained overweight on the FTSE 100 , the index that houses the U.K.’s most valuable public companies. U.K. large caps, they said, were “a geopolitical hedge due to … significant commodity and defensives exposure.” Noting that risks were skewing toward a weaker British pound and higher gilt yields — possibly upward of 5.25% on the 10-year gilt if a credible leadership challenge came to fruition — the team at Citi said they were screening London-listed equities for “macro sensitivities” to these pressures. UK10Y YTD line U.K. 10-year gilt Citi named 21 stocks that were well-positioned to withstand, or even outperform in, a high-yield weak-pound environment. They were: AstraZeneca , BAE Systems , Beazley , BP , British American Tobacco , Burberry , Glencore , GlaxoSmithKline , Harbour Energy , Hiscox Di , HSBC , Lion Finance Group, London Stock Exchange Group , Man Group , Pearson , Relx , The Sage Group , Shell , Standard Chartered , TP ICAP Group and Vodafone . Stocks negatively exposed to those market conditions included Primark owner Associated British Foods , homebuilders Barratt Redrow and Bellway , British Airways parent company IAG and grocery giant Sainsbury’s , according to Citi’s calculations. SALO opportunities Ben Needham, U.K. franchise portfolio manager at Ninety One, told CNBC that British assets look increasingly attractive “largely because the market has been remarkably indiscriminate this year.” “In February, basically any share with intangible assets was homogenously punished despite the huge variety of businesses sitting within that framing,” he said. Ninety One used this lull to add exposure to what Needham labelled “SALO businesses”; soft asset, low obsolescence companies. This included buying names such as LSEG , Relx , Experian , Autotrader and Amadeus . “We think the market generally took a ‘shoot first, think later’ approach which has created a great opportunity for mispricing with much more margin of safety than was the case last year,” he said. “Interestingly, since this sell-off, many SALO businesses have accelerated buybacks and cash returns which we view as a strong signal of value accompanied by activists appearing on certain share registers.” More recently, Needham added, hard assets and consumer names have taken a beating from a combination of supply chain and demand concerns related to geopolitical turmoil. “The likes of Unilever , Haleon and Magnum Ice Cream Company now find themselves on very depressed and in some cases unprecedented valuations despite fundamentals remaining largely sound,” he told CNBC. “Most companies we own are still growing broadly within a very respectable 4% to 8% organic range including names such as Experian, ConvaTec, Relx and Auto Trader, while businesses with strong value propositions such as Greggs and JD Wetherspoon continue to outperform in a tougher backdrop.” But he noted that Ninety One is being selective and has reduced some valuation risk in places where shares have rerated aggressively and the prospective risk-reward looks much less supportive. “This is particularly the case in certain semi cap names geared to AI spend,” he said. Scouring the SMIDs Adrian Gosden, a London-based investment manager at Jupiter Asset Management, agreed that there were big opportunities to be found in the U.K. market. “The narrative about investing in the UK is it’s a complete waste of time, but the facts are just not there,” he said during a meeting at Jupiter’s London headquarters. Last year, the Jupiter U.K. income fund returned 27%. Gosden pointed out that many FTSE 100 constituents were international heavy hitters — and many of the stocks on the index had surged in value over the past year. Rio Tinto, for example, has gained more than 61% over the last 12 months, while BP has jumped 56%. “So you have a stock market that isn’t reflective necessarily of the domestic economy,” he said. .FTSE .FTMC 5Y line The FTSE 250 is almost flat over the last five years. For more daring investors, Gosden said there are potentially even bigger returns to be found. “If you come down outside of the FTSE 100 and brave the waters of what we call SMIDs, which is a smaller mid-cap, it’s a horror show,” he added. Gosden pointed to housebuilding shares, which have dropped almost 50% of their value in a year, and hospitality shares, many of which Gosden said had lost half of their profitability over the last 12 months. “But for me, it’s always been that the opportunity is when you find these areas, and you can find companies with good balance sheets that can structurally navigate their way through this,” he said. “The opportunity is huge — for some of those companies I mentioned in the SMID area, a 1% improvement in the topline is a 20% improvement at the bottom. So if a brick company sold 5% more bricks than it’s currently selling today, its profitability will double.” While he noted that trading in this part of the market is “not for everyone,” Gosden said that finding the right opportunities at the right time could double investors’ money. Jupiter’s U.K. multi-cap income fund, which was expressly set up to cater to client requests to target this pocket of the market, delivered a 14.8% return in the year to April 30. “The market is very pessimistic, very pessimistic that anything decent could ever happen [in Westminster],” Gosden said of the U.K.’s political landscape. “And that’s a great starting point. A SMID — that area below the 3 billion [market cap] — is trading at a 20-year discount to its larger brethren. I’ve done it 30 years. I’ve seen it once before, and the returns the other side were spectacular.”
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