The Winners And Losers From The UK Market Turmoil

It’s been a rough year for UK investors. And the past week: it’s been one for the books. The British pound hit its lowest-ever point against the US dollar, and its bond yields surged, as investors reacted to the government’s new tax cuts and speculated about what steps the central bank might take. The UK’s turbulence is likely to be with us for a while, so let’s take a look at the market winners and losers it’s likely to create along the way…

First, why is everything suddenly going so wrong for the UK?

It’s not been sudden really: the country’s been facing sky-high inflation and a debilitating energy crisis all year, and it’s seen its economic growth slip below zero. The market response has simply amped up recently as investors lose confidence in the UK’s ability to navigate its woes – and not without reason.

See, the Bank of England, which has been trying to cool the country’s red-hot inflation, just last week delivered its seventh-consecutive interest rate increase, and warned that the economy is now in a recession. The move left some investors frustrated: the Federal Reserve had announced a 0.75 percentage point rise earlier that week, in its bid to stamp out inflation, and here was the BoE, facing higher inflation than the US and announcing a mere 0.50 point rise. A day later, those investors became even more frustrated, when the UK government unveiled a sweeping package of tax cuts that will increase government spending, add to the country’s debt load, and drive even more inflation in the process. Investors rushed for the market exits. And that selloff not only sent the currency to new depths, but also drove the price of British bonds, or “gilts”, lower – and its yields higher (as bond prices fall, their yields rise), meaning the cost of all that borrowing for the UK has gone up.

For investors: inflation is the enemy. And if the Bank of England can’t rein it in soon, the country will likely face stagflation, a grim, prolonged period of slow or negative growth, and high inflation. They’re looking for a more aggressive pace of rate increases from the BoE – one that will not only knock down inflation, but also help spark more foreign investment into the UK.

Who are the winners in all this?

Big multinationals.

UK companies that earn most of their revenues from overseas are in a good position: they’ll bring that stronger foreign revenue back home to the UK where it will stretch further when converted to pounds. And there are quite a few of those companies: they’re the key reason why the FTSE 100 is one of the best-performing markets this year. For a broader cross-section of the UK’s larger international-focused companies, you consider investing in the international-focused Vanguard FTSE 100 ETF (ticker: VUKF; expense ratio 0.09%).

Commodity companies.

BP (BP), Shell (SHEL), Rio Tinto (RIO), and Glencore (GLEN) should continue to perform relatively well, helped by foreign revenue and still-high commodity prices. And there are also more defensive companies with more than 50% of their revenues from overseas which could be more attractive in the current environment. GSK (GSK), and AstraZeneca (AZN) in pharmaceuticals are two, and Diageo (DGE), the alcoholic drinks maker (think Johnnie Walker, Guinness, Smirnoff) is a third.

The UK’s financial sector.

The UK’s banks can expect to see bigger profits from higher longer-term interest rates. The country’s largest bank, Lloyds (LLOY), has seen its share price slide sharply in recent days, as economic fears mount. But it could be an interesting buying opportunity once the markets stabilize.

And a few odd lots.

Other possible beneficiaries include Experian (EXPN) – the credit and marketing service firm is well-liked by analysts with 14 buy recommendations and four holds – and Ashtead (AHT), an equipment rental company that earns 90% of its revenues from the US. It’s also well-liked by “the street” – again with 14 buy recommendations and four holds. Ashtead is also expected to benefit from the Infrastructure Investment and Jobs Act, beginning next year.

Who are the losers then?

Housing and homebuilders.

The housing sector and its homebuilding industry are major areas of concern given the sharp increases in interest rates. Even before the latest turmoil, German investment bank Berenberg had downgraded its rating on the UK housebuilders, including Bellway (BWY), and Persimmon (PSN), expecting that they’d be in for a tough year, in part because the weaker pound would drive up the cost of raw materials like lumber. Affordability will only compound the problem for this huge segment of the economy, as higher interest rates sideline prospective homebuyers and create potential hardships for those whose fixed-rate mortgage terms expire. You could consider shorting Bellway or Persimmon, or for more broad-based exposure to the UK property and REIT market, you could look to short the iShares UK Property ETF (IUKP, 0.40%).

The British pound sterling.

Investors have already been lining up to short the pound. Just a few weeks ago, Deutsche Bank highlighted a worst-case scenario that it said could lead to a 30% slide in the pound, and that scenario now seems more likely. However, with the pound already falling so severely, you may want to wait to short the currency, at least until you see a short-term rebound. You can short the pound with the WisdomTree Long USD Short GBP ETF (GBUS; 0.39%).

UK-focused businesses.

The hospitality sector’s pubs, restaurants, and hotels import about 60% of their food and drink, and the weaker currency is going to make all of that more expensive. Brewers will struggle because of the increased cost of imported hops. To turn this trend in your favor, you could consider shorting the Vanguard FTSE 250 ETF (VMID; 0.10%), which is focused on the domestic UK sector.