Years of economic uncertainty, geopolitical tensions, and corporate scandals have eroded investor confidence in the UK stock market. This has led to a significant drop in trading activity, with the number of listed companies on the London Stock Exchange (LSE) down 37% since 2009.

Despite the FTSE 100 rising this year, I’ve noticed an unusually high number of pessimistic articles about the UK economy. The Brexit process, coupled with European Union trade disputes, seems to have fuelled a climate of uncertainty that weighs heavily on investor sentiment. Additionally, the lingering effects of the pandemic continue to present economic challenges and disrupt supply chains, further impacting market performance.

But value remains.

Keeping steady in rough seas

Interest rates soared in the past few years as The Bank of England attempted to tackle rising inflation. While this move was intended to curb rising prices, it also had a negative impact on the stock market. Higher interest rates increase the cost of borrowing for businesses, reducing their profitability and potentially leading to lower earnings.

With the first rate cut of the year already done, the outlook is beginning to improve. But there’s still much work to do.

Given the current market conditions, it’s crucial to be selective when choosing stocks. Investors should focus on companies with strong fundamentals, solid balance sheets, and sustainable business models. Also, it’s advisable to build a diversified portfolio across different sectors and asset classes to mitigate risk.

A pick for October?

With the above considerations in mind, my top stock pick for this month would be Tesco (LSE: TSCO). It’s one of the largest retailers in Europe and a popular choice for investors seeking a steady income stream. With a strong market position, extensive store network and consistent dividends, I believe it’s a reliable investment option to consider.

In recent years, Tesco has been implementing various strategies to improve its financial performance and enhance customer satisfaction. These initiatives have included closing underperforming stores, investing in online and digital capabilities, and focusing on value-driven promotions. These efforts have contributed to a gradual improvement in Tesco’s financial results, with earnings up 47% in the past year.

That said, grocery retail is highly competitive. Rivals such as Sainsbury’s, Asda, and Lidl put pressure on prices and market share. Inflation has dropped lately but if it rises again, consumers may seek out cheaper alternatives, threatening Tesco’s market share.

Supply chain issues are also an ever-present risk for retailers, particularly with the recent disruptions due to extreme weather and conflict around the Suez Canal. An inability to maintain stock levels could limit profits and hurt the share price.

A defensive dividend stock

While the above-mentioned risks must be taken into consideration, the grocery retail sector is considered to be relatively defensive. The basic need for everyday goods means consumers tend to continue purchasing essential items even during economic downturns. This can provide a degree of protection against market volatility.

With a 3.5% yield, Tesco may not seem that impressive dividend-wise. However, it has a long and reliable dividend track record and tends to increase payments during strong economic periods. To me, this is more important than sudden growth spurts or extraordinarily high yields. The ability to continue delivering value irrelevant of market conditions is key to safeguarding a portfolio during tough times.