Last week, the FTSE 100 hit a two-week low, with growth stocks declining sharply. This came in the wake of a global sell-off in financial stocks and fresh concerns about credit quality in US regional banks.
The global mood turned particularly cautious on Friday (17 October), as the UK market fell around 1.5% amid weakness in banks and oil stocks.
US-China tensions
Much of the pressure stemmed from escalating tensions in the ongoing US-China trade dispute. Beijing threatened tighter controls on rare earth exports, prompting President Trump to soften calls for 100% tariffs on Chinese goods.
The uncertainty rattled global investors and pushed many to cut exposure to cyclical stocks. UK growth stocks took a particular hit, with Babcock International slipping 8%, International Consolidated Airlines sliding 5.5% and Rolls-Royce falling 4.5%.
The UK economy
Despite the turbulence, the domestic picture looks somewhat brighter, with the UK economy returning to growth in August. Furthermore, the International Monetary Fund projected Britain to achieve the second-fastest growth among the Group of Seven nations in 2025, just behind the US.
That’s a reassuring signal after several years of stagnation fears.
Defensive sectors appear to be holding firm, including personal goods, pharmaceuticals, groceries and utilities. In contrast, more cyclical industries have suffered, with aerospace and defence dropping 3.5% last week.
The sharp fall in gold prices also hit precious metal miners, with Fresnillo dipping 11%. It appears that while the broader economy shows resilience, market sentiment is shifting towards companies that can weather global volatility more effectively.
How should investors react?
The growth stock narrative that’s fuelled UK markets for much of this year now looks to be losing steam. With international trade frictions and credit market concerns weighing on sentiment, cautious investors may want to focus on more defensive sectors such as consumer goods and utilities — rather than chasing aggressive growth stories.
One company that stands out to me for its defensive appeal is Reckitt Benckiser (LSE: RKT). The firm owns household names such as Dettol, Durex and Nurofen, giving it a strong presence in health, hygiene and nutrition products.
The business faced turbulence in early 2024 when a lawsuit related to its Enfamil infant formula line caused a sharp fall in its share price. However, after nearly two years, Reckitt has fully recovered those losses and looks stronger for it.
The share price has climbed around 25% since this time last year, supported by a 4.99% dividend increase and a solid return on equity (ROE) of 17.4%.
That said, Reckitt’s balance sheet carries some baggage. The company’s debt stands at about £9.3bn, higher than its equity, which may worry investors if borrowing costs rise further. It also trades at a relatively rich price-to-earnings (P/E) ratio of 32.6, suggesting further price gains may be limited.
While its £24.6bn in assets provides reassurance, the valuation leaves little room for disappointment if earnings growth slows.
Prepping for a shift
Reckitt’s strong brands and reliable income stream make it an appealing option to consider when growth stocks are on the back foot. It still has high debt levels and a stretched valuation, but its ongoing recovery exhibits resilience even during tough periods.
As the FTSE 100 adjusts to shifting global dynamics, investors might be wise to weigh up a more balanced mix of growth and defensive stocks in their portfolios.
