The UK is essentially the first shoe to drop as investors adjust to the new reality of higher long term interest rates, cautions Gavin Graham, contributing editor to Internet Wealth Builder.

The sell-off was exacerbated by the structure of UK pension funds, where defined benefit plans that pay out a certain percentage of final salaries are required to match assets with liabilities and increase their percentage invested in gilts regardless of their yield.

As a result, when the price of bonds began sliding, their losses grew rapidly. This was reinforced by the fact that the very low yields had meant many pension funds had used leverage to increase their returns and were effectively hit by margin calls.

I have recommended buying UK large capitalization stocks including such multinational stalwarts as drinks giant Diageo (DEO), consumer products leader Unilever (UL), drugs maker GSK plc (GSK), and US and UK power company National Grid (NGG).

All of these derive at least 40% and in some cases much more of their revenues and earnings from outside the UK. As a result, they benefit from a weaker pound, plus they pay attractive and rising dividends. They remain defensive stocks in a slowing global economy and are attractive at present levels.

Previously, I recommended the iShares MSCI United Kingdom ETF (EWU). It invests in the UK’s largest listed companies, which on average derive over 65% of their revenues and earnings from exports or overseas operations.

This ETF is down 19% over the last year. The current sell-off allows them to buy world class companies that trade at lower valuations than their North American competitors simply because they have their listing in the UK. Should the negative reaction be overdone, then buyers would have the additional tailwind of a domestic economy that isn’t as badly affected as more pessimistic commentators believe.

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