| • Large-cap value and higher-yielding sectors have led over quality growth • Elevated energy prices strain corporate profitability and consumer spending power • Valuation dispersion is creating selective opportunities for long-term income investors |
Sharp sector and style divergences are leaving the UK equity income market “unusually polarised”, as investors rotate between value, yield and quality growth in response to shifting inflation and geopolitical risks, according to Alan Dobbie, fund manager of the Rathbone Income Fund.
Dobbie says recent volatility underscores the case for diversification over binary macro bets: “A diversified income portfolio cannot rely solely on one market regime persisting. Recent months have shown just how quickly the leadership of markets can change when geopolitics intrudes.”
The Rathbone Income Fund has taken a more defensive stance, favouring businesses with prudent balance sheets, recurring cash generation and pricing resilience, while maintaining selective positions in domestically focused areas despite weaker sentiment.
“Large-cap value and high-yielding sectors have led in recent periods, while quality growth and more domestically oriented parts of the market have often lagged. That has opened up wide valuation dispersion across sectors and styles,” Dobbie says. “Uncertainty is the key word. No one knows day to day how this will resolve.”
Energy shock complicates outlook
After entering 2026 with inflation close to central bank targets, a renewed energy shock has reignited price-pressure concerns. Even so, current levels imply markets are braced for weaker growth rather than a severe global recession.
Higher energy costs are squeezing consumers and corporate margins, while supporting UK-listed pockets such as energy and resources.
Dobbie says: “History suggests the pace and scale of price rises matter more than the headline level. Compared with the oil shocks of the 1970s and early 1990s, today’s disruption appears less extreme. Economic growth is also significantly less carbon-intensive than in the past. Real wages, company earnings and short-term growth indicators remain relatively resilient, providing an important buffer against a sharper slowdown.”
Resilience and risks in UK equities
UK equities have been relatively resilient, helped by attractive valuations and index exposure to cash-generative sectors such as energy, mining, pharmaceuticals and banks. But Dobbie cautions the headline resilience can mask stress in parts of the domestic economy: “Consumer-facing businesses, housing-related names and domestic lenders remain more exposed to any prolonged squeeze on sentiment and spending.”
Volatility is also creating entry points for long-term investors. Dobbie says, “Good businesses are often marked down alongside weaker ones. This points to opportunities to add companies with strong cash flow and dividend prospects at more compelling valuations.
“Pricing remains widely dispersed, particularly in domestically sensitive sectors. For income investors, businesses with pricing power and dependable cash flows remain central to protecting dividends.”
In portfolio activity, the fund has trimmed positions in Shell and Relx, added to Breedon and Morgan Sindall, and initiated a new holding in Aviva.
