Some parts of the global stock market have experienced sharp falls so far this year. US shares have been particularly weak, especially the US technology sector. For instance, the tech-heavy Nasdaq index is now down 10% this year. Given it’s still January, that’s pretty weak and concerning. However, UK shares have fared relatively well so far. The FTSE 100 index is currently in positive territory for this year. Nonetheless, I’m still preparing my UK shares portfolio in case a stock market crash in the US negatively affects my UK shares.
Which UK shares?
So which shares should I consider buying in this environment? I’m currently looking at stocks in two sectors – consumer staples and utilities. I reckon these two areas could be the least volatile sectors if there’s stock market turbulence in the UK. There are several reputable stocks in the UK consumer staples sector. My top picks right now include Unilever, Diageo, and Imperial Brands. All three are high-quality companies with an impressive return on capital employed of between 15% -and20%. On average, these three shares offer a dividend yield of 5%. I’d say that’s pretty good. It also offers an additional layer of safety that could act as a buffer if my growth stocks falter.
Pricing power
High and rising inflation is a key concern for economists. If companies can’t pass on rising costs to customers, profit margins can suffer. One thing I like about these three companies is that they own strong brands that have pricing power. This means they’re usually able to pass on price rises, protecting margins.
That said, they’re relatively slow-growing companies. Their sales and earnings grow much slower than some of the higher-octane shares available to buy. But often, slow and steady can win the race over the long term. As such, I’d like to hold some of these staples in my Stocks and Shares ISA.
Powering dividends
In a volatile market environment I also like companies in the utilities sector. Share prices in this sector aren’t particularly exciting. However, they do tend to offer above-average dividend yields. Currently, I like National Grid and SSE in this sector. On average, they hand out 5% in dividends each year to shareholders. With relatively stable cash flows and reliable dividends, I reckon these two shares could make a good addition to my portfolio.
A word of warning however. I reckon the next move in interest rates is likely to be up. Just as in the US, the Bank of England might choose to push up interest rates to tackle high inflation. Rising interest rates could increase borrowing costs for utilities in particular due to their typically higher levels of debt.
But overall, I reckon these two UK shares could offer lower volatility and fewer swings for my portfolio. So I’d be happy to buy some shares today.
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Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo, Imperial Brands, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
