FTSE 100, UK stocks defensive amid Middle East conflict

This report is from this week’s CNBC UK Exchange newsletter. Do you like what you see? You can subscribe here.

It was no surprise, when stock markets first reacted to the news of the attacks on Iran, that the UK government FTSE 100 fell less than all its main continental European peers.

What is often considered Footsie’s weakness – its defensive array of pharmaceutical, utilities, tobacco and consumer goods stocks – becomes apparent during times of market volatility.

Additionally, the index contains numerous components that are likely to benefit from the turmoil in the Middle East, such as defense contractor. BAE Systems and industry suppliers, such as Babcock International, Rolls-Royce and Melrose Industriesas well as the big oil companies PA and Shell.

This is a well-established pattern in times of conflict: during the second Iraq war in 2003 and the 9/11 terrorist attacks in the United States, the Footsie outperformed its European peers and, during the latter, also the Dow Jones Industrial Average.

Mining stocks, which could benefit from rising commodity prices caused by disruption to shipping routes and supply chains, are also well represented in the FTSE 100. Rio Tinto, Glencore, Anglo-American and the Chilean copper mining company antofagasta are among the 20 largest stocks in the index, while companies like fresnillo and Endeavor Mining They are well positioned to benefit should uncertainty cause another rise in the price of gold.

These defensive qualities don’t just apply to the top 100 UK listed companies either. He FTSE 250UK mid-cap stock index, is packed with defense industry suppliers, including Qinetiq Group, Avon Technologies, Hunt and Seniornot to mention oil and gas exploitations such as Ithaca Energy, Port energy and clarksonthe world’s largest provider of integrated marine and shipbroking services, another likely beneficiary of the maritime disruption.

Therefore, for investors looking to maintain their exposure to stocks during times of conflict in the Middle East, the UK stock market is not a bad option.

To this it can be added that pound sterling usually suffers when currency investors look for safety plays in the US dollarhe swiss franc and the yenas seen on Monday morning, when the pound initially fell to a three-month low against the dollar.

Because FTSE 100 companies earn around three-quarters of their revenue in currencies other than the pound (around 45% or so comes in dollars), sterling weakness tends to be good for the Footsie.

This phenomenon has been understood for years by professional investors, but it shocked the general public when, in June 2016, the vote to leave the EU crushed the pound while the FTSE 100, after an initial sell-off, recovered.

This is not to say that the UK economy will not be harmed if this conflict drags on.

The UK is a net energy importer and as such vulnerable to increases in global natural gas prices despite sourcing most of its imported gas from Norway and not the Gulf.

Consequently, when QatarEnergy suspended LNG production in the industrial cities of Ras Laffan and Mesaieed on Monday, UK natural gas futures rose more than 40%.

The inflation rate in the UK soared after the energy price shock following the Russian invasion of Ukraine in 2022 and remained at high levels for the following two years.

The government’s response (subsidizing household energy bills) massively increased public borrowing, the consequences of which are still being felt today, while higher inflation forced the Bank of England into tight monetary policy.

If history were to repeat itself, that would not be good for first-timers or, indeed, the UK’s GDP.

British Prime Minister Keir Starmer is suffering a blow after his party came third in a key vote. The result in Gorton and Denton, Greater Manchester, is likely to intensify speculation about Starmer’s position.

Rolls-Royce raises its outlook and plans to buy back shares worth up to $12 billion as demand for engines drives growth. Rolls-Royce shares have been rising in recent years amid growth in its three businesses: civil aerospace, defense and energy systems.

Europe struggles to be heard as the war against Iran escalates. Few European officials were informed in advance about the US and Israeli attacks on Iran, a senior EU lawmaker told CNBC.

-Holly Ellyatt

MARCH 5: UK new car sales in February

MARCH 6: Halifax House Price Index for February

MARCH 10: February BRC Retail Sales Monitor