British assets have experienced significant volatility recently, driven largely by political developments surrounding Prime Minister Keir Starmer’s leadership. Doubts about his position have intensified as political rival Andy Burnham inches closer to launching a challenge for the role. Burnham, who has been widely expected to enter the fray, has confirmed his candidacy in a forthcoming by-election, a critical step required to enable him to challenge Starmer as the leader of the governing Labour party.
The turmoil has had tangible effects on U.K. sovereign bonds, commonly known as gilts, prompting volatile trading patterns. Starmer’s defiance against calls for his resignation has resulted in several resignations from his government, causing the yield on the benchmark 10-year gilt to hover near a post-2008 high. Yields on longer-maturity bonds are similarly approaching levels not seen since the late 1990s. Coupled with these developments, the British pound and London’s FTSE 250 index have also faced downward pressure.
Despite the surrounding political instability, many investors maintain a bullish outlook on London-listed equities. Analysts from Citi highlighted their continued overweight position in the FTSE 100, which comprises the U.K.’s most valuable public companies. They characterized U.K. large caps as a “geopolitical hedge,” pointing to their substantial exposure to commodities and defensive sectors. However, with the risks of a weaker British pound and higher gilt yields — potentially rising above 5.25% on the 10-year gilt should a credible leadership challenge materialize — Citi is also screening London-listed stocks for their sensitivity to these macroeconomic pressures.
Citi identified 21 stocks well-positioned to either withstand or outperform in a high-yield, weak-pound environment, including notable names like AstraZeneca, BP, HSBC, and Shell. Conversely, stocks such as Associated British Foods, Barratt Developments, and British Airways’ parent company IAG are seen as having negative exposure to the prevailing market conditions.
Investment strategies are also adapting. Ben Needham, U.K. franchise portfolio manager at Ninety One, described how British assets now appear increasingly attractive due to the market’s indiscriminate behavior earlier in the year. He emphasized the identification of “SALO businesses”—soft asset, low obsolescence companies—as a focal point for investments during this market lull. Ninety One capitalized on this by enhancing their portfolios with firms like LSEG, Relx, and Experian. According to Needham, the recent sell-off has allowed companies that continue to grow to pursue strategic buybacks and cash returns, signaling potential value.
Conversely, sectors including hard assets and consumer goods have recently faced pressure due to supply chain and demand issues stemming from geopolitical tensions. Companies like Unilever and Haleon are, despite solid fundamentals, experiencing significant declines in valuations.
Adrian Gosden, an investment manager at Jupiter Asset Management, also expressed optimism about the U.K. market. He pointed out that despite common narratives projecting a bleak investing landscape, many FTSE 100 companies have shown remarkable growth, with stocks like Rio Tinto and BP seeing substantial gains over the past year. Gosden emphasized the opportunities found beyond the FTSE 100, particularly in smaller mid-cap stocks, which he notes could yield substantial returns.
His assessment suggests that the market’s pessimism and the significant discount at which SMIDs are trading could facilitate impressive returns as conditions stabilize. Citing Jupiter’s U.K. multi-cap income fund, Gosden highlighted the performance of targeted investments in this sector, showcasing the potential for growth amidst broader economic challenges.
In summary, the current political situation is heavily impacting British assets, yet some investors see opportunities in the volatility. While major stocks have shown resilience, there are also risks associated with smaller and more vulnerable market sectors that could promise high returns for those prepared to navigate the uncertainties ahead.
