US President Donald Trump’s tariff blitz on April 2 saw the UK hit with a 10% levy on all goods exports to the US. While this was a lower tariff than some countries, UK markets still followed the global trend and entered correction territory. Financial, energy, and healthcare stocks saw the biggest losses but few sectors escaped the selloff.
Now that the UK and other trade partners have been given a 90-day reprieve, UK markets have rallied again. Still, the UK stock market continues to have high international exposure because of its components: pharmaceutical stock AstraZeneca AZN, oil giant Shell SHEL, and Asia-focused bank HSBC HSBA have the largest weightings in the Morningstar UK Index and FTSE 100.
Fund Managers Talk Defensive Stocks
How have fund managers reacted to this extreme volatility and what changes are they making to their portfolios?
Tineke Frikkee, portfolio manager of the Bronze-rated Waverton UK Fund, says she is not making drastic changes to the fund, pointing to its defensive nature that cushioned some of the harshest impacts of the selloff. National Grid NG. and 4-star-rated Associated British Foods ABF are two defensive plays that held up well despite the initial chaos. While National Grid shares have fallen in the last week, they are still up year to date, and Associated British Foods is down around 1% over the last five days.
National Grid and Associated British Foods are examples of utilities and consumer defensive stocks, which this table shows, have sold off the least since April 3.
Patrick Farrell, chief investment officer of Charles Stanley, says that his client’s portfolios have benefited from a significant exposure to utilities. He invests in the ATLAS Global Infrastructure Fund, which has a Morningstar Medalist Rating of Gold, and holds names such as water company Severn Trent SVT.
He also argues that the tariff shock will force the UK government to loosen fiscal rules, following Germany’s example.
While the FTSE 100 is full of large-cap multinational stocks, Farrell argues that smaller companies could benefit from higher government spending.
“That has to be on the cards for the UK economy and that will be a trigger point for a lot of the unloved small cap names in the UK, which are very much linked to the domestic economy,” he says.
Are UK Housebuilding Stocks a Defensive Play?
While UK real estate sector stocks also got caught up in the selloff, names like Persimmon PSN and Taylor Wimpey TW. have fallen less than the wider market.
There are two factors at play here: markets assume that Trump’s tariffs will force the Bank of England to cut interest rates, which will improve mortgage affordability and stimulate the domestic economy.
The sector is also immune to direct tariffs at least because these companies only make houses in the UK.
Persimmon and Taylor Wimpey are both significantly undervalued stocks according to Morningstar.
A lot depends on whether the UK can resist a global recession if it occurs.
Which UK Stock Sectors Sold Off the Most?
The UK’s stock market is dominated by financial services stocks. And while services are not yet part of the tariff regime, these stocks fell on fears of a retreat from globalization, economic downturns, and interest rate cuts that will hurt profit margins.
Many of these UK banks are sitting on strong gains from 2024, but have lost ground in the latest selloff.
Standard Chartered STAN, an emerging markets and Asia-focused bank, saw big declines because tariffs were levied the most on these regions.
Standard Chartered shares have lost nearly 20% in a month. Barclays BARC has a 32.2% exposure to US sales, according to FactSet data, and its share price has been volatile in recent trading days.
However, some UK banks have fared better than others. NatWest NWG only has a 1.4% exposure to the US, a legacy of its nationalization after the global financial crisis when it was repurposed as a domestic bank. The shares are almost unchanged in five days and marginally higher over a month. Even after the tariff turmoil, NatWest shares are still nearly 10% higher than at the start of the year.
Energy stocks were also caught up in the selloff, with BP BP. and Shell SHEL exposed to the fortunes of the global economy, whose proxy is the Brent crude price. BP and Shell shares are off around 10% in five days and are lower year to date as markets increase their expectations of an economic slowdown, which dampens demand for oil. UK-listed mining stocks have also suffered for similar reasons, as well as having exposure to China, the main focus of the new tariff regime.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
