Shelter from the Storm: How the UK can offer investors a place to hide

Key Points:

• End of US exceptionalism driven by tariffs, erratic policymaking in Washington leading to outflows from US equities

• UK stocks have been undervalued for years and can benefit from secular rotation out of US assets

• Several large-cap UK stocks offer attractive dividend yields that can insulate investors from volatile capital markets

• Major dividend payers reporting in the week ahead

AS companies report first quarter earnings updates, the reporting season will be key to locking down dividend payouts – who's cut, who’s pulling guidance and who’s sticking to the script. 

Global stock markets have been incredibly volatile since US president Donald Trump’s ‘liberation day’ tariff announcement. The period since April 2nd has been marked by competing news flow, wild swings in equity and bond markets, and general deleveraging by global investors. A hallmark of April has been the run from US assets, including equities, as well as Treasury bonds and the US dollar. The S&P 500 has fallen by around 9% since the announcement, at the time of writing.

In March we saw global investors ditch US equities at the fastest pace on record and flock to UK equities in anticipation of tariffs, with the latter hitting their highest allocation since June 2021, according to the BofA gfms. And while UK stock markets have not been immune to the headlines or economic fallout, with the FTSE 100 down approximately 4% since ‘liberation day’, investors are still looking for places to shelter. A one-dimensional ‘sell-US, buy-UK' approach is clearly too simplistic; while the UK offers defensive characteristics and income, selectivity is crucial.  

The preference for growth over value (and therefore to a degree income) has seen powerful returns for US equities compared to UK equities for over a decade. But the relative protection from higher-yielding UK stocks can be useful at times of severe market volatility. The value-oriented FTSE 100 offers a dividend yield about three times that of the S&P 500. With growth in the doldrums, value can shine.

Making this more pressing for investors, the breakdown in traditional stock-bond correlations has left the hunt on for alternatives to usual havens. Gold has provided the main outlet for safety-seeking investors with prices soaring 34% this year, which has benefitted a number of gold-oriented ETFs and Funds, as well as some miners, including Fresnillo and Hochschild Mining. 

Whilst these should remain in focus, there are some other interesting corners of the UK market that could also offer investors some relative safety from capital depreciation. It should be noted that when markets are stressed, capital preservation becomes even more important and some big dividend payers could be attractive.

Among these, tobacco stocks, insurers and housebuilders are among those offering both attractive dividend yields and decent near-term insulation from tariffs. Tobacco stocks offer consistent cash generation and are less exposed to cyclical growth stories, though a strong sterling exchange rate complicates the picture. Meanwhile both housebuilders and insurers are not exposed directly to tariffs, have a domestic market and may also benefit from expectations of lower interest rates, with tariffs seen nudging the Bank of England towards more cuts this year.

Casting a wide net, we can look to the biggest dividend payers with minimum £5bn market cap. At time of writing, asset manager M&G has the highest dividend yield, followed by insurer Phoenix Group, life insurer Legal & General, housebuilder Taylor Wimpey, Vodafone and British American Tobacco.