UK Equities: A Contrarian's Opportunity in Geopolitical Storms

The FTSE 100’s recent modest gains—up 0.2% in May 2025—mask a deeper truth: amid geopolitical turmoil, select UK equities are quietly positioning themselves as contrarian plays. While Sino-British trade friction and US-China tensions dominate headlines, a subset of companies has demonstrated resilience through strategic restructuring, geographic diversification, and sectoral focus. This article argues that now is the time to selectively target UK firms insulated from trade wars, particularly in sectors like luxury goods and insurance, while remaining vigilant toward cyclical vulnerabilities.

The FTSE 100: A Mixed Bag of Resilience and Risk

The FTSE 100’s May performance, driven by tariff relief and M&A speculation (e.g., BP and Burberry), reflects a market divided. Defensive sectors—healthcare, energy, and financials—have thrived, buoyed by ESG investing trends and capital-light strategies. However, cyclical sectors reliant on Asia, such as retail (exemplified by Next’s slump), remain exposed to trade disputes.

The key distinction lies in structural resilience. Companies with global footprints, brand strength, or cost discipline are outperforming those dependent on volatile trade corridors. Two exemplars—Burberry and Aviva—illustrate how UK firms can thrive in turbulent times.

Case Study 1: Burberry’s Strategic Reboot

Burberry’s share price, which plummeted from £25.94 in April 2023 to £5.92 in September 2024, offers a stark lesson in missteps—and recovery. The luxury brand’s sales in Asia-Pacific (APAC) collapsed by 25% in H1 2025 due to Sino-British trade tensions, but its "Burberry Forward" strategy has reignited hope.

• Product Pivot: Shifting focus to heritage-driven outerwear and scarves (priced at £1,500–£2,000) has reconnected with core customers, while slashing costs and inventory overhang.
• Geographic Diversification: APAC weakness was offset by growth in the Americas (+18% sales in Q2 2025) and Europe’s stabilization.
• Financial Turnaround: Despite a £53 million operating loss in H1, Burberry aims to return to £3 billion in sales by 2026 through a "good, better, best" pricing model and tighter inventory controls.

The contrarian bet here is clear: Burberry’s stock, down 77% from its peak, now trades at 7.4x forward earnings—a valuation that discounts its Asia exposure while rewarding its restructuring.

Case Study 2: Aviva’s Post-Merger Dominance

Aviva’s proposed £3.7 billion acquisition of Direct Line—currently under review by the UK’s Competition and Markets Authority (CMA)—is a masterstroke of strategic positioning. The merger would create a UK insurance giant with 20 million customers and a 70% capital-light business target by 2026.

• Market Power: If approved, Aviva would dominate UK motor and home insurance, leveraging synergies in claims processing and customer acquisition.
• Resilience: Strong financials (Solvency II cover ratio of 203%) and AI-driven efficiencies (e.g., generative AI in claims) insulate it from trade-driven volatility.
• Geopolitical Hedge: Aviva’s focus on domestic markets and wealth management (its largest UK division) buffers against global supply chain disruptions.

The CMA’s July 2025 decision is critical, but the upside is compelling: a 30% premium to book value and a dividend yield of 5.2% make Aviva a rare defensive gem in a volatile landscape.

The Contrarian Play: Why Now?

Investors should consider three pillars when building a UK equity portfolio:

1. Sector Selection: Prioritize defensive sectors (financials, luxury) and avoid cyclical stocks tied to Asia.
2. Geographic Diversification: Firms with exposure to the Americas or Europe (e.g., Burberry’s U.S. flagship sales) are less vulnerable to trade wars.
3. Structural Adjustments: Companies like Aviva and Burberry, which have cut costs and repositioned their offerings, offer asymmetric upside.

Risks and Diversification Needs

No investment is risk-free. The FTSE 100 faces headwinds:
- Brexit’s Lingering Effects: Exporters in trade-sensitive sectors may still struggle with regulatory friction.
- CMA Uncertainty: Aviva’s merger faces regulatory hurdles, though a 70% chance of clearance remains.
- Global Trade Volatility: US-China tariffs could delay Burberry’s APAC recovery.

Diversification is key: pair UK plays with global defensive equities (e.g., utilities, healthcare) and allocate 10–15% to UK sectors like luxury and insurance.

Conclusion: Act Now, but Act Selectively

The FTSE 100’s uptick is not a market-wide boom but a signal of opportunity in select companies. Burberry’s rebirth and Aviva’s dominance exemplify how UK firms can thrive despite geopolitical storms. For contrarians willing to look past the headlines, these stocks offer valuation discounts and strategic clarity.

The time to act is now—before the market catches up.

Investment recommendation: Long positions in Burberry (BURBY) and Aviva (AV.L), with a 6–12 month horizon, hedged against FTSE volatility.