Even as Europe struggles to avoid further meltdowns, the
economic pulse across the English Channel is starting to
A steady drumbeat of positive economic reports has led to
expectations that much better days lie ahead in 2014 and 2015 for
the U.K.economy . Meanwhile, Britishstock prices, which have
failed to keep pace with their U.S. counterparts, are starting to
emerge as timely bargains.
Back in 2010 and 2011, U.S.economists started to notice signs of
life among both manufacturers and consumers, citing a rising tide
of "green shoots" that popped up from the soil. That early
evidence of a moderate recovery in the U.S. eventually led to
robust share pricegains across all U.S.asset classes.
Fast-forward to 2013, and the same playbook appears to be
emerging in the U.K. For example:
- After shrinking 0.2% in the fourth quarter of 2012, the
U.K. economy grew 0.3% sequentially in the first quarter of
2013, and grew a further 0.6% in the second quarter.
- Sales at department stores rose 3% in June (from ayear
earlier), which was the strongest monthly growth rate in more
than a year.
- The Purchasing ManagersIndex (PMI) spiked to 52.5 in June,
the best showing in more than two years.
- The number of unemployed fell 51,000 in June, and the
nationalunemployment rate now stands at 7.8%, well below levels
seen in most European economies.
- After digesting recent economic reports, Ernst & Young
now believes the U.K.will grow 2.2% next year, which would be
the strongest growth rate since 2007. "With consumer confidence
returning and the government's initiatives to stimulate the
housingmarket bearing fruit, consumers are switching their
attention back fromsaving to spending," E&Y economists
noted in a recent report.
Perhaps the greatest endorsement of the economy comes from
surging foreign directinvestment . According to the U.N
Conference on Trade & Development, foreign direct investment
in the U.K. bottomed out at $50 billion annually in 2010 and
2011, but rebounded $62 billion in 2012, and is on track to
exceed $70 billion this year. (The U.S. is the leading investor,
by far, as U.S. corporations seek foreign platforms for
"The U.K. has been punching above its weight in attracting
overseas investment over the past year, suggesting that reforms
to improve the competitiveness of the tax system and our ability
tocapitalize on strengths such as the science base and flexible
labor markets place the U.K. high up the rankings for investors
around the world," noted Lee Hopley, aneconomist with a leading
manufacturing consortium in an interview with the Guardian.
Meanwhile, since global markets hit bottom in March 2009, the
S&P 500 has handily outperformed the FTSE-100.
There are several exchange-tradedfunds (
) with exposure to the U.K., including:
TheiShares MSCI United Kingdom Index (
This is a very popular choice, trading more than 2 million
shares a day, along with a reasonable 0.53%expense ratio .
ThisETF owns a broad variety of U.K.-based multinationals
HSBC Holdings (
Vodafone (Nasdaq: VOD)
), and should be seen more as aproxy for the global economy
rather than the U.K. economy.
First Trust United Kingdom AlphaDEX (
This ETF focuses on mid-cap companies that have a direct
focus on the U.K. economy, with key sector weightings
inconsumer cyclicals (27% of the portfolio), industrials
(19%) and financial services (17%). The 0.80% expense ratio
is a bit stiff, reflecting thisfund 's relatively small $15
million asset base.
iShares MSCI United Kingdom Small-Cap (NYSE: EWUS)
Small-capstocks tend to outperform in the early stages of
aneconomic recovery , making this ETF a timely investment.
The 0.59% expense ratio is middle of the pack, and the
focus on smaller stocks adds higher volatility. The sector
weighting is quite similar to the First Trust fund, though
the average $2 billionmarket value of each holding is just
one-third the size of the typical company held in the First
Risks to Consider:
The U.K.'s fiscal picture remains quite challenged, and
efforts to reduce the budgetdeficit could impede an economic
Action to Take -->
As the U.S. stock market has generated robust gains over the past
four years, it's time to seek out markets than haven't kept up.
With the U.K. economy showing signs of life, shares may be poised
to close the gap with their U.S. rivals.
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