How to Invest in UK Market Turmoil

7 min read

As the British pound hits its lowest point against the US dollar, bond yields surge in response to the government’s new tax cuts. With investors speculating about what steps the central bank might take, it’s clear that the UK’s turbulence is far from over. So, let’s take a look at the market winners and losers that are likely to emerge along the way.

First Things First, What Went Down in the UK Last Week of September?

The UK’s recent economic woes are not without reason, as the country has been facing sky-high inflation and a debilitating energy crisis all year. This has caused investors to lose confidence in the UK’s ability to navigate its problems, leading to a market response that has amplified in recent times.

Some investors were left frustrated last week when the Bank of England delivered its seventh-consecutive interest rate increase, warning that the economy is now in a recession. This was despite the fact that the Federal Reserve had announced a 0.75 percentage point rise earlier in the week in its bid to stamp out inflation. The BoE is now facing higher inflation than the US.

A day later, investors became even more frustrated when the UK government unveiled a sweeping package of tax cuts that would increase government spending, add to the country’s debt load, and drive even more inflation in the process. Investors rushed for the market exits, driving the currency to new depths and the price of British bonds, or “gilts”, lower. 

The cost of borrowing for the UK has gone up, meaning the already-frustrated investors now have to bear even more costs.

For investors, inflation is an enemy that can lead to stagflation – a prolonged period of slow or negative growth, and high inflation. The Bank of England will need to take action to rein in inflation and avoid this economic outcome.

The Bank of England is under pressure to raise rates more aggressively in order to bring down inflation and attract more foreign investment into the UK.

Who are the Winners (LONGS) of the UK Debacle?

UK Multinational Firms

Companies in the UK that earn most of their revenues from overseas are in a great position. The strong foreign revenue they bring back home will stretch further when converted to pounds. There are quite a few of these companies, and they’re the key reason why the FTSE 100 is one of the best-performing markets this year. For a broader cross-section of UK companies with an international focus, consider trading FTSE 100, don’t overextend with leverage, but be vigilant if you decide to trade longer than on the intraday graph. The index still has a bottom to catch should things go badly for the global economy, yet, due to its focus on international exposure, the index may be more resilient than large European indices. 

Commodities Firms

The multinationals BP, Shell, Rio Tinto, and Glencore are expected to continue performing relatively well, due to their foreign revenue and still-high commodity prices. 

Additionally, there are more defensive companies with over 50% of their revenue from overseas, which could be more appealing in the current market climate. 

Two examples from the pharmaceutical industry are GSK and AstraZeneca, and Diageo, the alcoholic drinks manufacturer (think Johnnie Walker, Guinness, Smirnoff) is a third.

To time the investment opportunity, consider using our award-winning wave and fibs Trading Method – SWAT (available for free via a broker sponsorship). 

UK Financial Firms

As interest rates creep upwards, Britain’s banks are looking at increased profits down the line. However, in the short term, many banks’ stock prices are taking a hit as economic concerns grow. For bargain hunters, this could be an opportunity to buy up shares in some of the UK’s largest banks when the market steadies. Alternatively, you can start looking into opening long CFD positions.

Unorthodox Bets

Other possible beneficiaries of the Infrastructure Investment and Jobs Act 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.

Losers (Shorts) of The Current UK Trend

The British Pound (GBP)

As the Brexit deadline looms, investors are increasingly bearish on the pound. Just a few weeks ago, Deutsche Bank warned of a worst-case scenario that could see the pound plunge 30%. With the uncertainty around Brexit showing no signs of abating, that bleak outlook now seems all too possible.

Yet, since GBP has already shredded a bit of value of the last week of September, it makes sense to wait for but for a short rebound and then commit again to shorting it against USD would be a decent bet. You can even save a bit of money on commission (as well as get our premium software) by using one of our sponsored brokers.

For ETF investors out there, WisdomTree Long USD Short GBP ETF (GBUS; 0.39%) is a good place to start.

Housing Market

Given the sharp increases in interest rates, the housing sector and its homebuilding industry are major areas of concern. 

Even before the latest turmoil, German investment bank Berenberg had downgraded its rating on the UK housebuilders, expecting that they’d be in for a tough year. The weaker pound would drive up the cost of raw materials like lumber, making it a difficult time for these companies.

The affordability crisis facing many prospective homebuyers is only set to worsen as interest rates rise, potentially creating difficulties for those with fixed-rate mortgages. One way to profit from this situation could be to short UK housebuilders such as Bellway or Persimmon or to invest in a short ETF such as the iShares UK Property ETF (IUKP, 0.40%).

Businesses Focused on UK

The UK hospitality sector is highly dependent on imported food and drink, and with the pound’s recent weakness, this is set to become even more expensive. This will put pressure on brewers, as the cost of imported hops will increase. 

To take advantage of this trend, you could consider shorting the Vanguard FTSE 250 ETF (VMID; 0.10%), which is focused on the domestic UK sector.

As always, we will be keeping in mind these opportunities while trading Portfolio ECS, our discretionary method that has been delivering decent returns for our institutional clients as of late. 

Safe Trading
Team of Elite CurrenSea 🇺🇦❤️

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